Cape Verde: IMF Executive Board Completes First Review Under the Policy Coordination Instrument for Cabo Verde

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Washington, DC - The Executive Board of the International Monetary Fund (IMF) completed the first review of Cabo Verde's economic performance under the Policy Coordination Instrument (PCI) [1] . The Executive Board's decision was taken without a meeting [2] .

Cabo Verde's PCI-supported program was approved on July 15, 2019 ( Press Release No.19/278 ) to support the implementation of the authorities' Strategic Plan for Sustainable Development (PEDS). The main objectives under the program are: (i) restoring fiscal and debt sustainability; (ii) restructuring State-Owned Enterprises (SOEs); (iii) enhancing the monetary policy framework and continuing to build reserves; (iv) fostering financial system stability; and (v) advancing growth-enhancing structural reforms.

Performance under the PCI-supported program has been strong. All reform targets were met, with some measures put in place ahead of schedule; and all end-September 2019 quantitative targets were met, except for the floor on tax revenue, missed by a narrow margin due to lower-than-projected taxes on international trade.

Cabo Verde's macroeconomic performance has been impressive under the implementation of the authorities' PEDS. Economic growth has been robust, reaching over 6 percent year-on-year at end-September 2019, and estimated at 5.5 percent for the year, mainly driven by strong activity in services, notably tourism, construction and industry. Inflation has remained low, averaging 1.1 percent in 2019. The current account deficit has narrowed from 7.9 percent of GDP in 2017 to an estimated 3 percent of GDP in 2019, reflecting strong export performance and deceleration in imports demand. This has helped Cabo Verde maintain an adequate level of international reserves. The overall fiscal deficit declined from 2.8 percent of GDP in 2018 to an estimated 1.9 percent of GDP in 2019, thanks to continued good revenue performance, higher grants, and expenditure restraint. As a result, and in conjunction with the robust growth, the ratio of public debt to GDP has declined from 125.9 percent in 2017 to an estimated 123 percent at end-2019.

Economic prospects for 2020 are clouded by the expected impact of COVID-19, resulting from the global economic downturn and travel restrictions which adversely affect tourism flows, foreign direct investment and remittances. Coordinated support from Cabo Verde's development partners will be needed to support the authorities' efforts in addressing the economic and social impact of COVID-19.

The medium-term outlook remains positive although risks are tilted to the downside. Growth is expected to rebound in 2021 and return to the pre-COVID-19 medium-term trajectory of about 5 percent as the global economy recovers, and the authorities maintain their structural reform efforts to improve the business environment and build the economy's resilience to adverse shocks.

Table 1. Cabo Verde: Selected Economic Indicators, 2017-24

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

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

[1] The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions

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