Statement by Mr. Afonso Bevilaqua, Executive Director for Cabo Verde and Mr. Ricardo Velloso and Ms. Carla Cruz, Advisors to the Executive Director June 15, 2022

On behalf of our Cabo Verdean authorities, we thank the staff team lead by Mr. Segura-Ubiergo for the comprehensive and insightful report. The authorities are also very appreciative of staff’s dedication and tireless efforts during these challenging times through both virtual and in-person interactions. The mission conducted in the country’s capital, Praia, contributed to building an even closer and more constructive policy dialogue, benefiting from the proximity to the reality on the ground and the additional availability of Government officials and other stakeholders.

Abstract

On behalf of our Cabo Verdean authorities, we thank the staff team lead by Mr. Segura-Ubiergo for the comprehensive and insightful report. The authorities are also very appreciative of staff’s dedication and tireless efforts during these challenging times through both virtual and in-person interactions. The mission conducted in the country’s capital, Praia, contributed to building an even closer and more constructive policy dialogue, benefiting from the proximity to the reality on the ground and the additional availability of Government officials and other stakeholders.

On behalf of our Cabo Verdean authorities, we thank the staff team lead by Mr. Segura-Ubiergo for the comprehensive and insightful report. The authorities are also very appreciative of staff’s dedication and tireless efforts during these challenging times through both virtual and in-person interactions. The mission conducted in the country’s capital, Praia, contributed to building an even closer and more constructive policy dialogue, benefiting from the proximity to the reality on the ground and the additional availability of Government officials and other stakeholders.

Despite the well-recognized success of the Government in fighting the pandemic, the country remains vulnerable to external shocks. Global uncertainties associated with the pandemic and its scars, amplified by the effects of the war in Ukraine, particularly on food and fuel prices, are weighing on the risks to the outlook of Cabo Verde, a small and open economy that is highly dependent on tourism and imports.

Against this background, the authorities seek support of the Executive Board for approval of a three-year Extended Credit Facility (ECF) arrangement in the amount of SDR 45.03 million (190 percent of quota). This arrangement will be instrumental in helping preserve macroeconomic and financial stability, maintain debt sustainability, and support the steadfast implementation of the country’s structural reform agenda envisaged in the Government’s Sustainable Development Strategic Plan (PEDS 2022–2026). The authorities are grateful for the successful conclusion of the program discussions with staff and timely consideration by the Executive Board of the ECF program request.

Background

Cabo Verde had engineered an impressive period of sustainable and inclusive growth prior to the onset of the pandemic crisis. The Government that took office in 2016 established an ambitious development program for the period 2017–2021, with the main objective of making Cabo Verde a hub economy in the mid-Atlantic. In 2019, the country celebrated the successful review of the Government’s Sustainable Development Strategic Plan (PEDS 2017–2021). The economy was growing fast: at 5.7 percent in 2019 and close to 5 percent annual average in the period of 2016–2019. That strong performance was sustained by favorable macroeconomic conditions upheld by adequate monetary and financial policies that continued protecting the exchange rate peg to the euro and maintaining inflation low and stable, and a strong fiscal policy framework. Robust growth and fiscal consolidation implemented during that period put the public debt-to-GDP ratio on a clear declining trend. Also, a comprehensive set of structural reforms were implemented, strengthening the investment climate, and improving economic diversification and inclusiveness with job creation and strong social outcomes.

In 2019, the authorities reinforced its engagement with the IMF by requesting an 18-month program under the Policy Coordination Instrument (PCI). At that time, there was no current or prospective balance of payments needs and, therefore, the PCI was the ideal instrument to strengthen the policy framework, signal the commitment to prudent policies and structural reforms, and catalyze external financing from other bilateral and multilateral development partners.

In 2020, however, the global pandemic hit particularly hard small island economies like Cabo Verde, interrupting the Government’s ambitious reform agenda given the need to focus on protecting lives and livelihoods upended by the pandemic. The Government’s COVID-19 response prioritized boosting the health system and protecting the most affected by the economic dislocation triggered by the global pandemic. Notwithstanding the Government’s swift actions, the economy experienced a historical contraction by almost 15 percent in 2020.

The global pandemic created significant balance of payments needs, requiring the authorities to request in April 2020 financial support under the Rapid Credit Facility (RCF). This timely support, in the amount of SDR 23.7 million (100 percent of quota), was instrumental in helping the authorities to implement its COVID-19 response plan and reduce fiscal and external financing gaps. It also helped to catalyze additional financial support, including from the World Bank, the African Development Bank, and other development partners of Cabo Verde. It is important to highlight that the execution of COVID-19 related spending has strictly followed the Government’s transparency and accountability practices. These include the daily publication on the Ministry of Finance website of all expenditures related to the pandemic fighting and, adhering to the public financial management guidelines, these expenditures are timely audited by the Court of Accounts.

A revised budget was approved in 2021 to better align spending priorities with the evolution of the pandemic and accelerate the vaccination campaign. As a result of the latter, as of May 22, 2022, approximately 98 percent of the target population were vaccinated with the first dose of the vaccine and 85 percent with two doses. Vaccines were mobilized with the support of several development partners, and a well-organized logistic system was put in place, allowing access to vaccines, including in the most remote areas given the archipelago geography of the country. The vaccination program in Cabo Verde is considered one of the most notable in sub-Saharan Africa.

Recent Economic Developments and Outlook

Thanks in no small part to the authorities’ assertive pandemic response, a robust recovery is underway. According to the National Institute of Statistics (INE), real GDP increased by 13.2 percent in the fourth quarter of 2021 (compared to the same quarter of 2020) and 7 percent on average in 2021 mainly due to a rebound in consumption and exports. This recovery reflects the positive impact of the well-implemented vaccination program, which helped to boost confidence in Cabo Verde as a safe tourist destination. This is reflected in the sharp increase in tourist arrivals, particularly in the last months of last year, as well as the resumption of FDI in constructions related to the tourism sector. Also, strategic public investments have contributed to the recovery, namely in key areas such as digital (technologic parks), transport, and in the agriculture, water, and energy sectors to mitigate the impact of the prolonged droughts.

The war in Ukraine, however, poses additional risks to this otherwise positive outlook. On top of the uncertainties related to new variants of COVID-19, the war in Ukraine has amplified global inflationary pressures due to higher food and fuel prices. Given that Cabo Verde is highly dependent on imports of commodities and the recovery in tourism may be adversely affected by the global economy slowdown, the real GDP growth projection for Cabo Verde in 2022 was cautiously revised downward, from 6 percent to 4 percent.

Fiscal Policy

Fiscal performance in 2021 was better than expected and the authorities are firmly committed to gradual fiscal consolidation going forward. Public spending prioritization based on the focused execution of key selected public investment projects and rationalization of current expenditures contributed to improving the fiscal position last year. The performance of revenue collections, however, was still affected by the continued impact of the pandemic on consumption and corporate income. Also, support to taxpayers included tax deferrals, which eased their tax burden amid weak economic activity. However, with the recovery taking hold, the Government will implement revenue mobilization measures which, combined with further public spending rationalization, should contribute to steady primary fiscal balance improvements over time. Revenue measures include tax and customs administration improvements as well as the introduction of electronic invoicing, imposition of import duties on previously exempted goods, increasing excise taxes, and the implementation of the ECOWAS common external tariff.

Preserving public debt sustainability is one of the authorities’ main priorities. The recent national account rebasing completed by INE, with IMF TA, pointed to an increase in nominal GDP by about 10 percent compared to previous estimates, leading to an important reduction in debt-to-GDP ratios. The authorities, nevertheless, recognize that Cabo Verde’s debt remains elevated, contributing to the perception that the risk of debt distress is high. However, liquidity indicators remain comfortably below their respective sustainability thresholds under the baseline scenario, reflecting the high level of concessionality of external debt, as shown in the updated DSA. To continue ensuring public debt sustainability, the authorities will improve further the efficiency of the public investment framework and implement prudent borrowing policies, preferentially through concessional external financing. Also, strengthened debt management practices, including to enhance the government securities market, and discussions with selected creditors on voluntary debt service relief (such as debt conversions into catalytic investment projects) will be undertaken. In addition, the Government will continue to mitigate SOE related fiscal risks. In this regard, the privatization agenda should be resumed in the near-term, with the Cabo Verde Airlines (CVA) privatization process as priority.

Monetary and Financial Policies

Monetary policy will continue to support macroeconomic stability. An accommodative monetary policy stance in the context of the pandemic was needed to put a floor on the downturn and foster the recovery while protecting the peg of the Cabo Verdean escudo to the euro. While some support measures have been extended until June 2022 due to the external shock triggered by the war in Ukraine, the authorities are committed to phasing out these measures. The Central Bank of Cabo Verde (BCV) will monitor closely global and domestic developments and, if needed, corrective measures will be considered to further strengthen the monetary policy transmission mechanism. Despite the projected reduction in international reserves in 2022, they should remain in the recommended range of 5 months of prospective imports over the medium-term.

The BCV will remain vigilant to emerging risks to the banking sector while taking steps to modernize the financial system. With the expected end of the debt service moratorium in June 2022, the BCV is preparing to provide comprehensive guidance on the prudential treatment of the moratorium and NPL management strategies, also developing a framework for the resolution of health crisis related NPLs. The BCV continues to be committed to strengthening the regulatory and supervisory frameworks and ensuring a stable and well-capitalized banking system to safeguard financial stability. Additional measures include amending the BCV Law to strengthen the central bank’s autonomy, accountability, and transparency, moving ahead with Basel II implementation, and improving monetary and financial sector statistics with help from IMF TA.

Structural Reforms

The authorities are engaged in a comprehensive agenda of structural reforms in support of faster, sustainable, and inclusive growth. Key priority areas and policies for the development of the country are identified in PEDS 2022–2026, which is aligned with “Cabo Verde Ambitions 2030” and the country’s Sustainable Development Goals (SDGs). A key objective is to support business environment reforms by facilitating access to finance to micro, small, and medium-sized enterprises, improving the functioning of the labor market, easing legal procedures, cutting red tape, and expediting judicial processes. Attracting private sector investment not only to the already well-established tourism and transport sectors but also to other sectors of the digital, green, and blue economies, water and sanitation, and renewable energy is key to the future of Cabo Verde.

The Government also intends to create a macroeconomic stabilization fund considering Cabo Verde’s high vulnerability and exposure to shocks. In addition to the severe impact of the pandemic and the war in Ukraine, Cabo Verde has been continuously affected by droughts since 2017. Building buffers to mitigate the effects of external and weather shocks, which are becoming more frequent due to climate change, will help to improve the resilience of the economy.

Social safety nets will be strengthened through improved targeting of social spending. Cabo Verde has an excellent track record of positive social outcomes, especially when compared with regional peers. However, poverty and unemployment remain high and will likely deteriorate with the rising price of essential goods and pandemic related scarring. Therefore, to protect the most vulnerable, the Government will strengthen and better target social programs, including the national income for inclusion program (RNI). In addition to reforming the national social security system, the Government will sign a pact for poverty reduction, which should be established with the partnership of key institutions and development partners, aiming to eliminate extreme poverty by 2026.

Conclusion

The authorities are fully committed to the IMF-supported program. They are confident that Fund support through the three-year ECF arrangement will help Cabo Verde to cover part of its financing needs, ensuring the continuation of the gradual economic recovery from the global pandemic despite the new external shock triggered by war in Ukraine, while preserving macroeconomic and financial stability and protecting the most vulnerable. The Fund program is also expected to provide support to the authorities’ fiscal consolidation plan and debt sustainability goals, as well as the implementation of their structural reform agenda as envisaged in PEDS 2022–2026.