Public Information Notice: IMF Concludes Article IV Consultation with Cape Verde

June 14, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 24, 1999, the Executive Board concluded the Article IV consultation with Cape Verde.1


During the first half of the 1990s, Cape Verde pursued expansionary policies in an attempt to stimulate growth. While growth of around 5 percent per annum was achieved, large macroeconomic imbalances emerged that resulted in the accumulation of a substantial domestic debt and the virtual depletion of foreign exchange reserves. Initial attempts at fiscal consolidation were frustrated by the domestic debt burden, and exchange controls were introduced to protect reserves.

In 1998 the authorities adopted an economic and financial program aimed at restoring financial stability. The program, which was supported by a Stand-By Arrangement with the Fund, included the implementation of a large domestic debt-reduction operation, supported by the donor community.

Despite failing rains on a large part of the islands, real GDP grew by 5 percent in 1998 (5½ percent on average during 1992-98), fueled mainly by the development of tourism, of export-oriented manufacturing, and of construction, stimulated by rising workers' remittances. Inflation declined to an average of 4.3 percent in 1998, from 8.5 percent in 1997, reflecting prudent monetary and fiscal policy. The exchange rate peg was changed from a peg to a basket of currencies to a peg to the Portuguese escudo on July 1, 1998, and to the euro on January 1, 1999. The overall budget deficit (on a commitment basis) was reduced sharply from 10.4 percent of GDP in 1997 to 4.3 percent of GDP in 1998 through a combination of improved tax administration and expenditure restraint. Contributions to the offshore Trust Fund, that was established to implement the domestic debt-reduction operation, from both domestic and external sources were below initial expectations, so that the authorities were obliged to postpone the domestic debt-conversion operation to 1999. Owing to a strong increase in workers' remittances, the balance of payments' current account deficit (excluding grants) declined from 17.5 percent of GDP in 1997 to 16.6 percent in 1998. The foreign exchange queue, which arose due to delays in the transfer of foreign exchange used for current transactions, was eliminated by mid-April 1999. In keeping with the Cape Verdean government's intention to accept the obligations of Article VIII of the Fund's Articles of Agreement, the country's foreign exchange regime was substantially liberalized. The trade regime was fully liberalized by abolishing all remaining import quotas. The comprehensive privatization program, implemented in close coordination with the World Bank, proceeded at a slower-than-expected pace in 1998, mostly as a result of administrative delays, but its pace accelerated in early 1999.

It is expected that in 1999 GDP will increase by 6 percent in real terms, spurred by a pick up of exports and tourism, following the substantial new investments in 1998; inflation is expected to fall to 3 percent, and a significant strengthening of the official reserves of the central bank is expected to take place.

Fiscal policy in 1999 will emphasize a broadening of the tax base, and larger allocations for the social sectors. The execution of the mainly foreign-financed public investment program is expected to be accelerated, and an emergency public works program directed to alleviate poverty will be carried out financed by part of privatization revenues. The domestic debt-reduction operation will be carried out in successive phases during 1999, starting in mid-year, with resources originating from external partners and from privatization proceeds. The operation involves the conversion of existing government debt for new bonds (TCMFs) which provide the holders with income generated by Trust Fund revenues. The privatization of the banking sector will be completed during 1999, and the payment system will be significantly improved through full computerization of interbank operations. The privatization program is expected to yield significant revenues, and will encompass, in addition to the two main commercial banks, the insurance company, the electricity company, the port, and the main foodstuff marketing company. The 1999 program is supported by an extension of the current Stand-By Arrangement with the Fund to the end of 1999.

Executive Board Assessment

Executive Directors welcomed the authorities' efforts to implement comprehensive structural reforms and improve the climate for private sector growth, while pursuing sound macroeconomic policies. They noted that, despite failing rains in a large part of the country, economic activity in 1998 had been sustained by the development of tourism, export-oriented manufacturing, and construction, supported by strong inflows of foreign investments. Inflation had been reduced, and continued to decline in early 1999. Directors commended the authorities for the considerable progress they had made in improving the fiscal position during 1998, and avoiding any recourse to domestic borrowing and bank credit.

Directors noted with satisfaction that the authorities had embarked on an ambitious privatization process that, if fully implemented, could be expected to lead to very large privatization revenues in 1999 and 2000. They welcomed the elimination of the quantitative import restrictions and the liberalization of foreign exchange regulations, which should facilitate the integration of Cape Verde into the world economy and encourage further foreign investment inflows. Looking ahead, Directors considered the medium-term outlook as favorable, but underscored the need, nevertheless, for sustained efforts to consolidate the progress achieved in both the macroeconomic and structural areas.

Directors observed that, with the exchange rate pegged to the euro, it is essential that monetary policy be geared to bringing the rate of inflation to the level prevailing in the euro area and to strengthening the level of reserves of the central bank.

Directors emphasized the need to consolidate progress in the public finances in 1999, by continuing with prudent expenditure policies, and further strengthening the tax system and budgetary procedures. While they considered that the budgetary stance for 1999 was broadly appropriate, Directors stressed the need to ensure that the poverty-alleviating emergency public works program is well-targeted and its size maintained within reasonable bounds, with due regard for absorptive capacity. More generally, they suggested that efforts be made to improve the quality of expenditures. Directors considered it important that further progress be made in rationalizing the tax system, including the streamlining of the external tariff and the introduction of a value-added tax, which would contribute to broadening the tax base.

Directors noted that diversification of Cape Verde's export base was now giving notable results, and considered very encouraging the strong flow of foreign direct investment, which contributed to strengthening production and export capacity.

Directors regretted that the implementation of the domestic debt-reduction operation supported by Cape Verde's donors had been delayed until mid-1999. In this context, they underscored the importance of mobilizing rapidly the resources from the privatization program, to enable the timely contribution of Cape Verde to the resources for the debt reduction operation.

Directors welcomed the progress toward deeper, more competitive financial markets. They commended the authorities for the improvement of the domestic payment system, the strengthening of central bank prudential supervision, and their intention to sell the government's participation in the former state banks. Together with the development of the stock exchange, these steps would contribute to improving the allocation of savings and the effectiveness of financial flows.

Directors supported the authorities' policy of liberalizing the exchange system for current and capital transactions, and welcomed the authorities' intention to accept the obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement. In this context, they welcomed the elimination of the foreign exchange queue in mid-April 1999, and the measures envisaged to eliminate restrictions on travel allowances.

Directors urged the authorities to continue their efforts to improve the quality of statistical data.

Cape Verde: Selected Economic Indicators, 1996-99 1/

  1996 1997 1998 1999

  (Annual percentage change)
Domestic economy  
Real GDP 3.5 5.2 5.0 6.0
Consumer prices (annual average) 5.9 8.5 4.3 ...
GDP deflator 4.0 5.8 2.9 2.0
  (In percent of GDP)
Gross fixed investment 38.8 39.1 40.2 42.6
Gross domestic savings 5.9 8.4 8.3 11.1
  (In millions of U.S. dollars) 2/
External economy  
Exports, f.o.b. 29.6 40.2 27.5 37.8
Imports, f.o.b. 205.7 211.1 203.7 237.7
Current account balance (excluding grants) -72.4 -84.9 -82.4 -90.8
Current account balance (excluding grants;
 in percent of GDP)
-14.7 -17.5 -16.6 -16.3
Capital and financial account balance 95.2 71.9 83.6 101.6
Debt service (in percent of exports of goods
 and nonfactor services)
11.4 12.9 15.9 12.6
External debt (in percent of GDP) 41.0 44.6 46.2 46.4
Real effective exchange rate
(end of period; percentage change) 3/
-0.7 3.4 -4.5 ...
  (In percent of GDP)
Financial variables  
Government revenues 21.1 19.5 24.0 24.4
Current expenditures 22.8 23.3 22.0 21.5
Overall fiscal deficit (commitment basis) 4/ -13.9 -10.4 -4.3 -6.8
Total grants 13.3 10.5 10.8 11.1
Change in broad money (in percent) 8.9 12.1 1.8 7.9

Sources: Cape Verdean authorities; and IMF staff estimates.

1/ IMF staff estimates.  
2/ Except otherwise indicated.  
3/ Minus sign indicates a depreciation  
4/ Including grants.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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