Press Release: IMF Completes Third Review Under Cape Verde's PRGF Arrangement and Approves US$1.8 Million Disbursement

December 19, 2003

The Executive Board of the International Monetary Fund (IMF) completed today its third review of Cape Verde's economic performance under an SDR 8.64 million (about US$12.7 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 02/18). The completion of this review enables the release of a further SDR 1.23 million (about US$1.8 million), which would bring the total amount drawn under the arrangement to SDR 4.92 million (about US$7.2 million).

Cape Verde's three-year PRGF arrangement was approved on April 10, 2002 for SDR 8.64 million (about US$12.7 million). So far, Cape Verde has drawn SDR 3.69 million (about US$5.4 million) under the arrangement.

The PRGF is the IMF's concessional facility for low income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the Executive Board's discussion on Cape Verde, Agustín Carstens, Deputy Managing Director and Acting Chairman, stated:

"The Cape Verde authorities' have taken corrective action to address the macroeconomic slippages of the first half of the year. Economic growth remains strong, inflation continues to be low, and progress is being made in establishing conditions for higher rates of private sector-led economic growth. The authorities have continued their impressive pace of structural reforms. However, the stock of international reserves remains too low to provide an adequate buffer against recurrent shocks, and the accumulation of reserves during the first nine months of 2003 was generally slower than envisaged. It is therefore important to orient monetary policy toward a continued accumulation of international reserves. In this regard, the recent tightening of monetary policy should help to maintain confidence in the exchange rate peg.

"The authorities' proposed macroeconomic policy mix for 2003-04 strikes an appropriate balance between the need to move ahead with implementing the poverty reduction strategy and the need to ensure adequate fiscal support for the accumulation of international reserves. The program for 2004 allows for the continued expansion of education and health services, a modest increase in international reserve coverage, and adequate growth in credit. This will require budget support from Cape Verde's development partners.

"The authorities should prepare a high-quality PRSP as quickly as possible. It will provide the opportunity to prioritize and cost their policies, and help ensure that the level of public spending is consistent with accelerating economic growth and poverty reduction, while preserving macroeconomic stability. It will be particularly important for the authorities to set clear and attainable targets for expenditures in public education and health, given the dominance of these sectors in the central government wage bill. The authorities should make every effort to limit future external financing of their poverty reduction strategy to grants and highly concessional loans in order to increase poverty-reducing expenditures without endangering external debt sustainability.

"Progress in implementing structural reforms has been commendable, including reduced financial losses in public enterprises and preparations to implement a VAT and new customs tariffs on January 1, 2004. Making the new Economic Regulatory Agency fully operative will be essential to ensuring the profitability and efficiency of public utilities, which, in turn, will be key to reducing the need for budgetary support and promoting private sector growth," Mr. Carstens stated.


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