International Monetary Fund (Washington, DC)

3 December 2012

Cape Verde: Statement At the Conclusion of an IMF Mission to Cape Verde

press release

Washington, DC — An International Monetary Fund (IMF) mission, led by Mr. Sukhwinder Singh, visited Cape Verde from November 15-30, 2012, to conduct discussions on the 2012 Article IV Consultation. The mission met with the Minister of Finance and Planning Cristina Duarte, Central Bank Governor Carlos de Burgo, other government officials, parliamentarians and representatives of civil society, development partners, and the private sector. The mission would like to thank the authorities for their excellent cooperation and hospitality.

At the conclusion of the mission, Mr. Singh made the following statement: "Cape Verde's growth has slowed in 2012 given the stagnation in the Eurozone and weak domestic demand. While FDI has dropped off significantly, economic performance has been resilient with emigrant inflows holding up and tourism doing well.

Inflation has been benign in this lower growth environment. Overall, coordination of macroeconomic policy has been strengthened with fiscal policy adjusted in the course of 2012 to support the BCV's tightening of monetary policy from late 2011. As a result, reserves have stabilized. Credit growth has slowed considerably this year, reflecting slower demand and increased credit risks. Cape Verde is likely to face an even more difficult external environment in 2013, given a deterioration in the outlook for the global economy.

Growth is expected to slow to 4.1 percent, cushioned by a peaking of the public investment program which will offer some support to domestic demand. Inflation is projected to remain under control, although some uptick is expected on account of tax policy changes. With the overall balance of payments outturn expected to be similar to 2012, reserves should remain over three months of imports of goods and services. The exchange rate peg remains an appropriate monetary anchor." "Given elevated debt levels, modest reserves, and risks from the external environment, the mission advises the authorities to launch a medium-term fiscal consolidation effort beginning in 2013.

This is necessary to rebuild the fiscal space and a cushion of reserves to protect against shocks, including the prospect of less concessional financing in the years ahead. Tax reform including a rationalization of tax incentives should be central to the fiscal strategy that aims at reversing the decline in tax revenues of recent years. Rebuilding capacity at the tax administration is an urgent priority in this regard.

Effort is also required to slow the growth of current spending. To lay the platform for future growth, Cape Verde has been implementing a critical and ambitious upgrading of its infrastructure financed by concessional assistance. The focus should shift away from adding to the capital stock through starting new projects, to improving the quality and efficiency of ongoing public investment.

The opportunity for such fiscal adjustment should be seized while debt service ratios remain low and manageable." The mission finds the 2013 budget to be expansionary. However, it understands that, just as with the prudent adjustment in 2012, spending will be scaled back if there are revenue shortfalls. Even so, the mission advises a smaller than planned increase in the capital budget executed through on-lending to state-owned enterprises. The social safety net supporting vulnerable households should be safeguarded.

Initiatives to further improve public investment management are laudable." "The mission strongly supports the tax reform measures being implemented in the areas of VAT, rationalising of exemptions and strengthening of the tax code." "The current stance of monetary policy should be maintained into 2013, although will need to be calibrated to the evolution of fiscal policy and external uncertainties. Private sector credit is expected to start recovering. The mission welcomes the authorities' efforts to strengthen the legislative framework for the financial sector. It encourages vigilance in the supervision of financial institutions, given rising non-performing loans.

Improved performance of loss-making state-owned enterprises is important both for growth and lowering fiscal risks to government. Assuring the long term fiscal viability of the social security fund (INPS) is an important public priority." "Higher productivity in Cape Verde will require complementing higher physical capital with investments in human capital and improvements in the business climate. Increasing the linkages of the primary sectors to tourism and the development of other service sectors offers opportunities for increasing employment and more inclusive growth." "The Article IV consultation report of the mission is expected to be discussed by the IMF Executive Board in early February, 2013."

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