Cape Verde: Cabo Verde Sovereign Debt and Economic Profile

1 November 2022
analysis

Cabo Verde is one of those countries one hardly gets to hear about.

The country is an archipelago of 10 islands off West Africa's coast in the Atlantic Ocean. The country is fascinating economically and politically. According to the World Bank, "Cabo Verde is considered an example of democracy in Africa, much for its political stability.

Electoral processes have been held regularly, with peaceful alternation of power between the two major parties. The left-wing African Party for the Independence of Cabo Verde (PAICV), which headed colonial liberation, governed for two 15-year periods (1975-1991 and 2001-2016).

  • Cabo Verde is an exceptional country. It is exemplary. This accolade is because of the country's stability both economically and politically. The country holds elections regularly and has peaceful transitions of power between the various players in its political matrix.
  • Cabo Verde has a population of 491,233 according to statistics from a census conducted in 2021.
  • Until the COVID-19 pandemic struck, Cabo Verde was a beacon on the African continent of poverty reduction especially in Sub-Saharan Africa.

The Movement for Democracy (MpD), a liberal and right-wing party, was re-elected for a five-year term in the legislative elections of April 2021, with Ulisses Correia e Silva reappointed as Prime Minister. The Independent and Democratic Cabo Verdean Union (UCID) represents the third political force in the country. The PAICV-supported candidate, José Maria Neves, was elected president on October 17, 2021, and took office on November 9, 2021.

Cabo Verde conducted three peaceful elections, with electronically transmitted results, between October 2020 and October 2021."

This is very refreshing especially in the context of politics in Africa. That a country like Cabo Verde can host a thriving democracy on its soil that has seen three peaceful transitions of power is indeed exemplary. Cabo Verde has a population of 491,233 according to statistics from a census conducted in 2021.

The country has little in terms of mineral resources and arable land that is suitable for agriculture. World Bank statistics show that only 10 per cent of the country's land is arable. The country's geography is fragmented and as such this state make services like connectivity, education, water, energy, and health very difficult to deliver.

  • The economy of Cabo Verde grew by 7 per cent in 2021 after contracting by 14.85 per cent in 2020. The resurgent growth of the country was driven by construction, manufacturing, and consumption both public and private.
  • Public debt stands at 143 per cent of GDP. This metric according to the IMF places Cabo Verde in the category of countries in sovereign debt distress with a likelihood of default unless there is an intervention economically.
  • The country together with Eritrea did not elect to participate in the IMF/World Bank instituted Debt Service Suspension Initiative. This was an ill-conceived move in as far as the country's public finance is concerned.

The country has experienced significant economic progress driven mostly by tourism which accounts for 25 percent of its GDP. Social development in Cabo Verde has come from strong social policies that have been in place since the 1970s.

Until the COVID-19 pandemic struck, Cabo Verde was a beacon on the African continent of poverty reduction especially in Sub-Saharan Africa. The World Bank reports that, "Estimates based on economic growth suggest that poverty rates, measured by the $5.5-a-day poverty line (2011 PPP), declined by six percentage points between 2015 and 2019, from 41 per cent to 35 per cent." The economy of Cabo Verde grew by 7 per cent in 2021 after contracting by 14.85 per cent in 2020.

The resurgent growth of the country was driven by construction, manufacturing, and consumption both public and private. The country's fiscal deficit stood at 7.3 per cent of GDP in 2021. Public debt stands at 143 per cent of GDP. This metric, according to the IMF, places Cabo Verde in the category of countries in sovereign debt distress with a likelihood of default unless there is an intervention economically.

The country, together with Eritrea, did not elect to participate in the IMF/World Bank instituted Debt Service Suspension Initiative. This initiative by the leading multilateral institutions of the world was pioneered by G20 countries looking to give financial reprieve to low-income countries that are in sovereign debt distress.

By not electing to participate in the initiative, Cabo Verde like all those that did not participate missed out on the opportunity to have its loans restructured and a one-year moratorium on loan repayments.

The war in Ukraine and the ongoing drought are exacerbating food and energy-driven inflation in 2022, threatening growth. Real GDP growth is projected at 4 per cent in 2022 (2.9 per cent in per capita terms) versus 7 per cent in 2021, which is aggravating food insecurity.

  • The public debt-to-GDP ratio is expected to improve from 147.7 per cent in 2022 to 141.1 per cent by 2024 the World Bank reports.
  • The public debt overhang in Cabo Verde can be dealt with if the country pursues the strategy that South Korea pursued in 1997. The strategy made it possible for the Asian country to settle a loan from the IMF of US$58 billion in four years.
  • Cabo Verde could also follow the example of Mauritius by expanding the range of services the economy offers. The in flows from this economic focus should help the company settle its public debt.

The Ukraine crisis will weigh on growth, mainly through inflation and its impact on private consumption and economic activity. Inflationary pressures will peak in 2022, with headline inflation expected to reach 7.5 per cent. Over the medium term, private consumption, investment in tourism, and the blue economy should support growth.

The outlook is subject to substantial downside risks stemming from climate shocks, new COVID-19 variants, and increased global uncertainty due to the Ukraine war.

The fiscal deficit is projected to reach 9 per cent of GDP in 2022, driven by increased current expenditures due to the response package to mitigate the impact of the Ukraine war. The public debt-to-GDP ratio is expected to improve from 147.7 per cent in 2022 to 141.1 per cent by 2024 the World Bank reports.

The African Development Bank's outlook on Cabo Verde is that economic growth is uncertain because of the headwinds arising from the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine together with a prolonged drought.

Cabo Verde imports at least 11 per cent of its oil and 8 per cent of its cereals from Russia. Projections for economic growth are expected to be below pre-pandemic levels. The economy of Cabo Verde is expected to grow by 5.1 per cent in 2022 and 5.7 per cent in 2023.

The growth in the economy is expected to be driven by services and renewable energy. Poverty and unemployment are expected to fall, with inflation expected to reach 5.2 per cent in 2022 and then normalizing at 2.5 per cent in 2023 as global supply chains improve.

The AfDB further expects that "... The fiscal deficit is projected to narrow from 6.4 per cent of GDP in 2022 to 4.6 per cent in 2023 on fiscal consolidation. The current account deficit is projected at 10.1 per cent of GDP in 2022 and 7.5 per cent in 2023, supported by tourism and remittances, while foreign reserves will stabilize at five months of imports."

  • It must diversify economic activity away from tourism and get into financial services like its sister nation Mauritius, a financial centre in Africa.
  • The likelihood of default from debt distress for Cabo Verde will also depend on how much of its debt stock is denominated in US dollars or any other hard currency.

The debt overhang in Cabo Verde can be dealt with if the country pursues the strategy that South Korea pursued in 1997. The strategy made it possible for the Asian country to settle a loan from the IMF of US$58 billion in four years. Cabo Verde needs to pursue export-driven economic growth and develop a strong domestic economy. Cabo Verde could also follow the example of Mauritius by expanding the range of services the economy offers.

It must diversify economic activity away from tourism and get into financial services like its sister nation Mauritius, a financial centre in Africa.

The likelihood of default from debt distress for Cabo Verde will also depend on how much of its debt stock is denominated in US dollars or any other hard currency. Agriculture though a small contributor to the economy, is nonetheless critical. Agriculture needs to be climate-proofed to mitigate the impact of droughts. According to the World Bank and AfDB, the country is steadily reducing its debt. It only needs to ensure that it does not experience further shocks to its economy.

In its favour the country's economic freedom score is 66.7, making its economy the 49th freest in the 2022 Index. Cabo Verde is ranked second among 47 countries in the Sub-Saharan Africa region, and its overall score is above the regional and world averages. The country may be classified as a poor nation; however, the quality of life ranks highest in the United Nations index of West Africa.

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