Cape Verde and the IMF

Press Release: IMF Completes Second Review Under Cape Verde's PRGF Arrangement and Approves US$1.7 Million Disbursement
June 26, 2003


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Cape Verde—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
June 9, 2003

The following item is a Letter of Intent of the government of Cape Verde, which describes the policies that Cape Verde intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Cape Verde, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

On December 16, 2002, the Executive Board of the IMF concluded the first review of the three-year arrangement for Cape Verde under the Poverty Reduction and Growth Facility (PRGF), approved on April 10, 2002, in the amount of SDR 8.64 million.

The attached memorandum on economic and financial policies (MEFP) reviews the achievements made during the first year of the program and sets out the objectives and policies the government of Cape Verde is pursuing during 2003.

Cape Verde's economic performance in 2002 was generally positive. Macroeconomic policies have been deliberate, and progress has been made in key structural areas. All quantitative and structural performance criteria for end-December 2002 and end-January 2003 were met. The government believes that its policies for 2003, as described in the attached MEFP, will build on this favorable performance and establish the conditions for achieving a high level of sustainable economic growth and a reduction in poverty. On this basis, the government requests the completion of the second review under the PRGF arrangement.

The government considers the measures and policies set forth in the attached memorandum appropriate for achieving its program objectives, but it will take any further action that may prove necessary for this purpose. For as long as Cape Verde has outstanding financial obligations to the Fund arising from the loans under the arrangement, the government will consult with the Fund, at the initiative of the government or whenever the Managing Director requests consultation, on Cape Verde's economic and financial policies.

The government will conduct with the Fund the third and fourth reviews under the PRGF arrangement, the third not later than end-December 2003 and the fourth by end-June 2004.

The government authorizes the Fund to provide this letter, the attached memorandum, and the associated staff report to all interested parties that request them, including through the Fund's external website.

Sincerely yours,

/s/
Carlos Augusto Duarte Burgo
Minister of Finance and Economic Planning

Memorandum on Economic and Financial Policies for 2003

I. Introduction

1. Cape Verde's medium-term economic program is being supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) covering the period 2002-04. This memorandum sets forth the economic and financial policies of the government of Cape Verde for 2003, as well as the broad economic objectives for 2003-05. To guide its policies for poverty reduction and growth, the government prepared an interim poverty reduction strategy paper (PRSP), which was approved by the Boards of the IMF and World Bank in April 2002. The government has completed its PRSP preparation status report and is working to complete the full PRSP by the end of 2003.

II. Performance Under the 2002 PRGF-Supported Program

2. Economic and financial performance continued to improve in 2002, and the PRGF-supported program is on track. Real GDP growth recovered to about 4 ½ percent, fueled by rising private and public investment, average inflation fell to 1.8 percent, and the overall balance of payments was in surplus. All quantitative performance criteria for end-December 2002 were met, some by large margins. The government implemented an automatic oil price adjustment mechanism (OPAM) on January 1, 2003, thereby meeting the structural performance criterion under the program (Attachment I, Tables 1 and 2).

3. The fiscal deficit (excluding grants) declined moderately from 10.8 percent of GDP in 2001 to 10.6 percent in 2002. Domestic revenue increased to 23.8 percent of GDP, reflecting strong international trade taxes and the collection of tax arrears. Total expenditure increased to 34.5 percent of GDP, primarily because of higher capital expenditures, but also because of the promotion of existing civil servants and the recruitment of new teachers and tax officers late in the year. The deficit was financed by net external flows amounting to 10.4 percent of GDP (including grants of 8.7 percent of GDP). Including grants, the fiscal deficit fell from 4.8 percent of GDP in 2001 to 1.9 percent, a moderately larger adjustment than programmed, and the primary recurrent surplus increased to 5.4 percent of GDP. The government was able to limit domestic borrowing to 0.2 percent of GDP. The reduction in domestic borrowing, including the large cash settlement of domestic arrears, helped to bring down the average interest rate on treasury bills from 11 percent at the end of 2001 to 6 ½ percent at the end of 2002.

4. Despite the modest improvement in the fiscal deficit, the external current account deficit (excluding official transfers) increased from 14.2 percent of GDP in 2001 to 17.0 percent in 2002, reflecting strong growth of imports of capital goods associated with the increase in private domestic investment. The larger current account deficit was more than covered by net official and private capital inflows, and the overall balance of payments registered a large surplus for the second consecutive year. As a result, international reserve coverage increased from 1.5 months of imports in 2001 to 2.1 months in 2002.

5. Against the background of continued fiscal consolidation, low inflation, and a strong overall balance of payments, the Bank of Cape Verde (BCV) began to ease monetary policy in mid-2002 by lowering its lending rate with a view to gradually reducing domestic interest rates, mindful that the primary objective of monetary policy remains to ensure that international reserves continue to rise. The rate of growth of broad money increased from 9.8 percent in December 2001 (on a 12-month basis) to 14.3 percent in December 2002, primarily because of an increase in government recourse to domestic bank credit to finance the cash settlement of old domestic arrears.

6. Progress with structural reforms during 2002 was mixed. The new organic central bank law, the value-added tax (VAT) law, and the new customs tariff schedule were unanimously approved by the National Assembly in June. However, because of a lengthy review process, additional legislation necessary for the implementation of the VAT was not approved until April 2003, and there have been technical delays in disbursements of donor support. Consequently, the government has revised the target date for implementing the VAT, as described below. The government liquidated two large loss-making public enterprises: EMPA (food import and distribution) and TRANSCOR (municipal transport). Retrenchment payments associated with the liquidation of EMPA, which had been programmed to commence late in 2002, began in early 2003. Substantial income losses were realized in two important companies: Electra (the minority government-owned electricity and water monopoly) and the TACV (the wholly government-owned national airline). The government has already taken action to stem these losses in 2003.

III. Program for 2003-04

A. The Poverty Reduction Strategy for the Medium-Term Program

7. The government first introduced Cape Verde's poverty reduction strategy in the context of the 1997-2000 National Poverty Alleviation Plan (NPAP) and the National Development Plan (NDP). The vision set forth in the NPAP was updated in the Grandes Opcoes de Plano (GOP), a strategic medium-term framework for economic and social development and poverty reduction approved by the National Assembly in December 2001. The government's strategic priorities for reducing poverty, as derived from the GOP, are (i) the promotion of good governance; (ii) support for private sector-led economic growth and a broadening of the productive base; (iii) the enhancement of human capital; (iv) the implementation of a comprehensive policy to reduce poverty; and (v) the balanced development of infrastructure across the Cape Verde archipelago. Based on the principles outlined in the GOP, a new NDP covering the period 2002-05 was approved by the government in April 2003.

8. Now that the interim PRSP has been issued and the NDP updated and approved, the stage has been set to finalize Cape Verde's poverty reduction strategy paper (PRSP), which is replacing the NPAP as the government's poverty reduction strategy document. The government has prepared a PRSP preparation status report, highlighting achievements to date and actions to be taken. Key milestones already reached include the completion of the household income and expenditure survey, the 2000 census, and the public expenditure reviews. These studies will provide important inputs into the analysis of the nature, origins, and extent of poverty and the prioritization of public expenditures, with a view to meeting the most urgent needs of the poor. The government is developing its capacity, with donor support, to explore alternative medium- and long-term macroeconomic frameworks, which will improve the analysis of the linkages between growth and poverty and provide inputs into the costing of the government's antipoverty programs. The final poverty diagnostic report based on the household survey and census is scheduled for October 2003, with the final PRSP to be ready by the end of the year.

B. Medium-Term Macroeconomic Objectives and Strategy

9. The key elements of the government's economic strategy remain to (i) pursue fiscal consolidation in order to free up financial resources for the private sector, alleviate pressure on the external current account, and facilitate a gradual reduction in domestic interest rates without undermining the balance of payments; (ii) redirect public expenditures toward health, education, security, and the development of infrastructure; (iii) implement monetary policy consistent with a further increase in international reserves; and (iv) implement structural reforms to enhance private sector competitiveness and promote private sector-led economic growth in order to reduce unemployment and poverty.

10. The key macroeconomic objectives for 2003-05 are to (i) achieve a rate of economic growth on the order of 5-7 percent; (ii) limit inflation to 2-3 percent, (iii) increase gross international reserves to the equivalent of 2 ½-3 months of imports of goods and services by 2005; and (iii) limit the fiscal deficit (including grants) to about 2 ½ percent of GDP. Broad money growth on the order of 8-10 percent a year and growth in credit to the economy on the order of 11-14 percent would be consistent with these objectives. Meeting these economic and financial targets will require the continued technical and financial support of donors, including additional budget support.

IV. The Program for 2003

11. The government's 2003 macroeconomic framework is based on (i) an increase in real GDP growth to 5 percent; (ii) end-period inflation of 2.2 percent; and (iii) a moderate increase in gross international reserves of €6 million, which will be sufficient to maintain import coverage at about 2.1 months.

A. Fiscal Policy

12. The government will continue to pursue fiscal consolidation while increasing expenditures in key social areas. Domestic revenue is projected to rise by 11 percent to CVEsc 19.1 billion (24.5 percent of GDP), reflecting the continued collection of tax arrears, the elimination of the excise exemption on diesel fuel consumed by Electra, and the continued buoyancy of trade taxes. Total expenditure is programmed to rise by 6 percent to CVEsc 26.3 billion (33.8 percent of GDP). Against this background, the fiscal deficit (excluding grants) is programmed to fall to CVEsc 7.2 billion (9.2 percent of GDP). The deficit will be fully financed from net external flows, and the government will be able to reduce its net domestic indebtedness by about 0.1 percent of GDP.

13. Recurrent expenditures are programmed to increase by about 9.4 percent to CVEsc 16.7 billion. The wage bill will increase by 8 percent to reflect a 2.5 percent wage increase, the progression through grade for existing teachers (which has been frozen for nearly ten years), and the hiring of additional teachers, medical doctors, and tax inspectors. Transfers and subsidies are programmed to rise by nearly 15 percent, reflecting the hiring of additional police, an increase in transfers to municipalities (which are linked to the central government's revenue of the previous year by law), an increase in provisions for the National Assembly, and a contingent provision for a temporary subsidy to Electra (amounting to CVEsc 310 million). This provision is being made to help offset accumulated losses arising, in part, because the government delayed raising electricity and water tariffs following the privatization of Electra, despite the sharp increases in fuel costs. This subsidy will be paid only if the external audit of Electra indicates it is necessary and only if Electra's management implements internal reforms as outlined below. Excluding this provision, recurrent expenditures are programmed to rise a more modest 7.4 percent. Extraordinary expenditures will more than triple to CVEsc 845 million (1 percent of GDP) in 2003, including CVEsc 745 million for retrenchment payments to former employees of EMPA and TRANSCOR. Capital expenditure is programmed to decline slightly from 2002 but will remain strong by historical standards, reflecting recent improvements in the implementation of donor-funded projects.

14. The government will implement the VAT and new customs tariffs on January 1, 2004. All necessary legislative action on the part of the National Assembly has been taken. To ensure that the new target date is met, the Council of Ministers will approve the VAT preregistration decree by end-June and amend the National Accounting Plan by end-September. The preregistration decree will specify who must register for the VAT, their reporting requirements, and the principles for the application of penalties in case of noncompliance. The new VAT law and customs tariffs will be included in the 2004 budget. Structural conditionality will apply to these actions, as described in Table 4 of this attachment. The government is taking other actions to strengthen revenue performance, expenditure management, and fiscal transparency. In this regard, it will complete a comprehensive review of tax exemptions by the end of September 2003, with a view to significantly reducing them over the medium term. A resident budget advisor has been appointed to help improve the budget process and expenditure management and reporting. The treasury will prepare a comprehensive assessment of the stock of verified domestic payments arrears as at end-2002. The government will begin submitting quarterly accounts of central government fiscal operations to the National Assembly by the end of June 2003. It will continue implementing the recommendations made in the donor-funded Country Financial Accountability Assessment, which will further enhance fiscal transparency, accountability, and the quality of expenditures.

B. Monetary and Financial Sector Policies

15. The BCV will pursue a monetary stance consistent with a modest increase in international reserves. If the balance of payments is sufficiently strong, then the BCV will consider easing monetary policy to induce a further, gradual decline in domestic interest rates. Strict adherence to the fiscal target for 2003 will be necessary to achieve these dual objectives. Broad money is projected to increase by about 8 percent, in line with nominal GDP. With credit to the economy growing by about 12 ½ percent and credit to the central government rising by 3 percent, the increase in international reserves will be sufficient to maintain international reserve coverage at 2.1 months of imports of goods and services.

16. The BCV has made notable progress in implementing its 2003 work plan to strengthen its operational and oversight responsibilities. On-site examinations were completed for the two new offshore banks, and the reports have been submitted to the BCV board of directors for approval. The banking supervision department of the BCV intends to complete on-site examinations of two of Cape Verde's four domestic banks and an insurance company this year. Off-site examinations have been computerized, which has enhanced the BCV's ability to analyze the soundness of the banking sector. The BCV will be seeking technical assistance to undertake a comprehensive review of Cape Verde's financial sector legislation, with a view to establishing a legislative framework conducive to financial development and diversification. The central bank will also begin working toward consolidating, revising, and strengthening the legislative framework governing the development and supervision of microfinance institutions.

17. In addition, the BCV will continue to implement the recommendations of the IMF's safeguards assessment report. The board of the BCV has issued a resolution specifying the deadlines for publishing the annual report and the audited financial statements. The BCV has also prepared and enacted a manual of guidelines for the proceedings of the internal audit function. The new organic central bank law, approved in 2002, mandates the adoption of International Accounting Standards (IAS), which will be fully applied in the 2003 audit of the BCV's operations. A new external auditor has been identified, and contract negotiations are expected to be concluded soon. The one remaining action necessary to comply with the safeguards assessment report recommendations is to bring the BCV's internal audit procedures in line with the IAS. The BCV has requested the technical assistance necessary for it to meet this objective in 2003.

C. External Sector

18. Achieving a sustainable external current account balance, in the context of Cape Verde's fixed-exchange rate regime and the gradual decline in domestic interest rates, will require continued fiscal consolidation, the enhancement of external competitiveness through structural reforms and the development of human resources, and the creation of an environment conducive to foreign investment. To this end, the government will continue to focus its public investment program on basic infrastructure, such as energy, water, roads, and telecommunications, and to reorient recurrent expenditures toward education, health, and security. The government's growth and competitiveness project (2003-07), financed by the World Bank, will focus on improving the investment climate through tax reform, the alleviation of administrative barriers to investment, legal reform, private sector capacity building, and financial sector reform and development. In addition to policies emerging from the growth and competitiveness project, the government is promoting exports by developing export-oriented industrial parks and opening up new tourist destinations to foreign investors. These actions are already bearing fruit. In addition, Cape Verde's export sector will benefit from access to U.S. textile markets under the African Growth and Opportunity Act, the expected lifting of the European Union embargo on Cape Verde's seafood products, and the acquisition of air-traffic landing rights in the United States.

19. The improved outlook for exports notwithstanding, the external current account deficit (excluding official transfers) is projected to rise from 17 percent of GDP in 2002 to about 18 percent in 2003, reflecting a cautious outlook for private transfers. Net official and private capital flows are projected to be lower than in 2002, but still sufficient to permit a modest increase in international reserves.

20. The government has reached agreements regarding the clearance of external arrears with all its creditors, excepting Russia and Spain, with whom discussions are continuing. The government has improved its database on external debt stocks and payment obligations, which has enabled the government to keep current on all its external obligations. The government will contact the government of São Tomé and Príncipe regarding the modalities of Cape Verde's provision of debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

D. Structural Reforms

21. In addition to the structural reforms discussed above, the government will pursue reforms in the public enterprises, including privatization, the regulatory environment, and pension reform.

22. With regard to Electra, the government raised electricity and water tariffs by 25 percent and 20 percent, respectively, on January 1, 2003. The positive impact of the tariff increases on Electra's income were partially offset by the elimination of the price subsidy on diesel fuel consumed by the utility. The government is undertaking a comprehensive external audit of Electra, with donor assistance, to ascertain Electra's financial condition and to recommend cost-saving measures. If the audit indicates the need, the government is prepared to provide Electra with a temporary subsidy to reduce its financial losses in 2003, subject to progress on the part of Electra's management in:

  • improving bill collection;

  • reducing technical losses;

  • improving internal audit procedures;

  • reducing the number of staff;

  • improving maintenance of existing facilities; and

  • restructuring debt.

In addition to the increase in tariff rates already effected, the government will do its part to improve Electra's financial condition by:

  • continuing to pay all its bills to Electra on time;

  • clearing all its verified arrears to Electra;

  • moving quickly to establish the multisector regulatory agency to oversee the implementation of an automatic and transparent tariff adjustment mechanism; and

  • determining if there are any legal obstacles that inhibit Electra's ability to collect payments from the private sector.

23. The government has appointed new management to the TACV, which is implementing measures to reduce losses, including the elimination of loss-making routes, the replacement of high-cost aircraft with more energy-efficient lease aircraft, and reductions in the number of staff. The government will monitor progress through periodic reports prepared by management. In addition, the government will initiate work on a comprehensive regulatory approach to the transport sector to ensure that high-cost interisland service by the TACV continues without undermining the TACV's financial performance. The government also appointed a new director of the privatization program earlier this year to improve government oversight of the public enterprises slated for privatization. The government will push ahead with preparing the TACV, the public fish-freezing company (INTERBASE), and the ship repair facility (CABNAVE/CABMAR) for privatization.

24. The National Assembly approved the general regulatory framework law in April 2003, and the government will establish and staff the multisector regulatory agency by September of this year. Among its other responsibilities, the new agency will implement the new oil price adjustment mechanism and an automatic and transparent electricity and water tariff adjustment mechanism. The government, with donor assistance, will begin developing a strategy for reforming the public pension scheme.

E. Statistical Issues and Capacity Building

25. The National Institute of Statistics (INE) will complete the steps necessary to bring its statistical systems in compliance with the General Data Dissemination System (GDDS) framework. It has adopted the GDDS as the country's statistical framework, appointed a country coordinator, and prepared the metadata. It will soon finish compiling demographic data. The INE now publishes a quarterly business confidence index and will publish the 1998-2000 national accounts before the end of 2003. It will also rebase the consumer price index on the basis of the recently completed household income and expenditure survey. The INE will begin to develop annual household indicators and coordinate and integrate social data from the line ministries to strengthen Cape Verde's capacity to monitor the impact of its poverty reduction strategy. Cape Verde is receiving technical assistance in a number of other areas, including tax reform, expenditure management, and banking supervision, and is seeking additional technical assistance in the area of treasury operations, as well as continued assistance in the area of balance of payments statistics.

V. Program Monitoring

26. Program implementation through December 2003 will be monitored according to the performance criteria and benchmarks presented in Attachment I, Tables 2 and 4. The definitions of quantitative performance criteria and benchmarks and reporting requirements are contained in the attached technical memorandum of understanding (TMU). Paragraph 20 of the earlier TMU (EBS/02/54; 3/22/02) has been dropped, reflecting the introduction of the automatic petroleum pricing mechanism, which has obviated the need for reporting on petroleum imports and sales. The relevant sections of the TMU have also been amended to reflect the new adjusters for deviations in external debt service, nonproject donor support, and the cash payment of domestic arrears relative to the program assumptions.

Table 1. Cape Verde: Quantitative Performance Criteria and Benchmarks Under the First Annual Program Supported by the PRGF Arrangement1,2
       2001
Dec.
Est
.
Cumulative Flows from End-December 2001
2002
2003
Mar.
Jun.
Sep.
Dec.
Mar.
Jun.
Indi-
cative
bench-
mark
Actual Perform.
criteria
Perform.
criteria
(adjusted)
Actual Indi-
cative
bench-
mark
Indi-
cative
bench-
mark
(adjusted)
 Actual  Perform.
criteria 
Perfo.
Indi-
cative
Actual Indi-
cative
bench-
mark
Indi-
cative
bench-
mark

  (In billions of Cape Verde escudos)
Quantitative benchmarks
                             
Ceiling on net domestic credit to the central government from the banking system3 11.7 0.2 -0.4 0.5 1.1 0.7 -1.7 0.4 1.8 2.8 3.6 2.7 3.5 4.2
                             
Ceiling on net domestic assets of the central bank3 8.6 0.0 -1.6 0.2 0.8 -1.0 0.2 2.3 -0.9 0.3 1.1 -1.0 0.1 0.5
                             
Ceiling on the accumulation of new domestic payment arrears by the central government 3.2 0.0 . . . 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0
                             
  (In millions of U.S. dollars)
Ceiling on the accumulation of new external debt arrears by the central governmen4 15.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
                             
Ceiling on the contracting or guaranteeing of non-concessional external debt with original maturity of more than one year by the central government5 0.0 0.0 2.5 0.0 0.0 2.5 0.0 0.0 2.5 2.5 2.5 2.5 0.0 0.0
                             
Ceiling on the outstanding stock of nonconcessional external debt with a maturity of less than one one year by the central government6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
                             
  (In millions of euros)
Floor on net international reserves of the Bank of Cape Verde (BCV)7 46.2 1.4 27.3 1.4 -4.3 15.6 2.5 -16.5 18.4 9.4 -4.6 26.1 12.0 4.3
                             
  (In billions of Cape Verde escudos)
Memorandum items:                            
Floor on the primary current fiscal balance (indicative target) 2.0 -0.2 1.9 0.3 . . . 2.6 2.9 . . . 3.9 3.5 . . . 3.9 4.0 4.9
                             
Nonproject external financial assistence, including credit line (program assumption) 5.0 1.3 1.7 2.0 . . . 1.7 3.4 . . . 1.7 3.8 . . . 2.1 4.3 4.3

1Quantitative performance criteria and benchmarks are described in the technical memorandum of understanding (EBS/02/54, Appendix I, Attachment III).       
2Program exchange rates for 2002 are CVEsc 110.3 = EUR 1 and CVEsc 122.5 = US$1.
3The ceiling will be adjusted upward (downward) by the cumulative downward (upward) deviations from program assumptions about nonproject disbursements from the World Bank (US$7.5 million), the African Development Bank (SDR 4 million), European Union adjustment grants (EUR 12 million), the Portuguese credit facility (EUR 5 million), and the World Bank supplemental credit (US$ 3 million). Maximum cumulative
adjustments in 2002 will not exceed 75 percent of programmed disbursements. In 2003, adjustments will apply to any deviations in nonproject external financial assistance relative to program assumptions.
4This performance criterion is on a continuous basis.
5 This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are rescheduling arrangments, the Portuguese credit line, and borrowings from the Fund.
6The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000). Excluded from this performance criterion are rescheduling arrangments, the Portuguese credit line, borrowings from the Fund, and normal import-related credits.
7The floor on net international reserves of the BCV will be adjusted downward (upward) by the cumulative downward (upward) deviations from program assumptions about nonproject disbursements from the World Bank (US$7.5 million), the African Development Bank (SDR 4 million), European Union adjustment grants (EUR 12 million), the Portuguese credit facility (EUR 5 million), and the World Bank supplemental credit (US$ 3 million). Maximum cumulative adjustments in 2002 will not exceed 75 percent of programmed disbursements. In 2003, adjustments will apply to any deviations in nonproject external financial assistance relative to program assumptions.


Table 2. Cape Verde Quantitative Performance Criteria and Indicative Targets Under the Second Annual Program Supported by the PRGF Arrangement1,2
        Cumulative Flows from End-December 2002
2002
Dec.
Level
2003
Mar.
Estimate
Jun.
Perform.
criteria
Sep.
Indicative
target
Dec.
Perform.
criteria

Quantitative targets (In billions of Cape Verde escudos)
           
Ceiling on net domestic credit to the central government from the banking system3,4 14.4 -0.2 -0.0 0.3 0.5
           
Ceiling on net domestic assets of the central bank3   7.6   0.6   0.4 0.1 0.2
           
Ceiling on the accumulation of new domestic payment arrears by the central government   1.1   0.0   0.0 0.0 0.0
           
  (In millions of U.S. dollars)
Ceiling on the accumulation of new external debt arrears by the central government5   7.4   0.0   0.0 0.0 0.0
           
Ceiling on the contracting or guaranteeing of non-concessional external debt with original maturity of more than one year by the central government5,6   0.0   0.0   0.0 0.0 0.0
           
Ceiling on the outstanding stock of nonconcessional external debt with a maturity of less than one year owed or guaranteed by the central government5,7   0.0   0.0   0.0 0.0 0.0
           
  (In millions of euros)
Floor on net international reserves of the Bank of Cape Verde (BCV)8 72.4   1.0   0.5 4.7 2.9
           
  (In billions of Cape Verde escudos)
Memorandum item:  
Floor on the primary current fiscal balance
(indicative target)
  3.9   0.9   2.2 3.4 4.7
           
Program assumptions          
           
Nonproject external financial assistence, including credit line (program assumption)   2.0   0.9   1.4 1.8 1.9
           
External debt service   3.5   0.7   1.2 1.8 3.1
           
Cash payments of domestic arrears   2.0   0.0   0.0 0.3 0.4

1Quantitative performance criteria and benchmarks are described in the technical memorandum of understanding (Attachment II). 
2For purposes of calculating program adjusters, actual debt service payments and actual nonproject external financial assistance will be valued at current exchange rates.
3The ceiling will be adjusted downward (upward) by the cumulative downward (upward) deviations in external debt service and upward (downward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. For purposes of calculating the adjusters, these flows will be valued at current exchange rates.
4The ceiling on net domestic credit to the central government from the banking system will be adjusted downward by the shortfall in cash payments of domestic arrears relative to program assumptions.
5This performance criterion is on a continuous basis.     
6This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are rescheduling arrangments, the Portuguese credit line, and borrowings from the Fund.
7The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000). Excluded from this performance criterion are rescheduling arrangments, the Portuguese credit line, borrowings from the Fund, and normal import-related credits.
8The floor on net international reserves of the Bank of Cape Verde will be adjusted upward (downward) by the cumulative downward (upward) deviations in external debt service and downward (upward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to pogram assumptions. For purposes of calculating the adjusters, these flows will be valued at current exchange rates.

Table 3. Cape Verde: Structural Performance Criteria and Benchmarks Under the First Annual Program (2002) Supported by the PRGF Arrangement
Measures Test Dates Status or Amended Test Dates

Prior action    
Submission of value-added tax (VAT) legislation to the National Assembly Done  
Approval by the Council of Ministers of new central bank organic law to strengthen statutory independence of the central bank Done  
Structural performance criteria    
Coming into effect of new organic central bank law to strengthen statutory independence of central bank End-June 2002 Done
Approval by the Council of Ministers of the automatic and transparent pricing mechanism for retail petroleum products, publication of such mechanism in the official gazette, and implementation of such mechanism End-June 2002 Done
Structural performance benchmarks    
Inclusion of VAT and external tariff reform in 2003 budget October 2002 October 2003; VAT implementation postponed until January 1, 2004
Establishment of external debt-management committee to oversee external debt strategy and ensure timely payments of debt service falling due February 2002 (Done)  


Table 4. Cape Verde: Structural Performance Criteria and Benchmarks Under the Second Annual Program Supported by the PRGF Arrangement
Measures

Test Dates

Status or Amended Test Dates


Structural performance criteria

   

Approval by the Council of Ministers of the VAT pre-registration decree

June 2003

 
     

Structural performance benchmarks

   

Approval by the Council of Ministers of the amended National Accounting Plan

September 2003

 

Inclusion of VAT and external tariff reform in 2004 budget

October 2003

 

Begin external audit of Electra

June 2003

 

Approval by the Council of Ministers of the decree establishing the multi-sector regulatory agency

September 2003

 


Table 5. Cape Verde: Structural Reform Objectives in 2002
Measures Test Dates Status

Fiscal and monetary    
Preparation of tax reform, including introduction of value-added tax (VAT) and external tariff reform on January 1, 2003 Continuous Ongoing
Inclusion of VAT and external tariff reform in 2003 budget October 2002 To be implemented October 2003
Strengthening of tax administration department of Ministry of Finance to implement VAT Continuous New tax inspectors hired
Review of tax exemption policy and preparation of action plan to reduce exemptions September 2002 Preliminary review completed. Com-prehensive report by September 2003
Strengthening of implementation of new tax collection system through commercial banks Continuous Ongoing
With donor assistance, rationalization of strategy and financing for university-level scholarships December 2002 Done
Strengthening of fiscal management and control through improved treasury expenditure control procedures Continous Budget advisor appointed
Completion of preliminary public expenditure review with World Bank assistance July 2002 Final report completed
Transmission of final fiscal-year 2001 budget accounts to National Assembly for review December 2001 Delayed
Introduction of new organic central bank law to strengthen statutory independence of central bank June 2002 Done
External sector    
Preparation for introduction of new streamlined tariff regime on January 1, 2002 Continuous Ongoing
Establishment of external debt-management committee to oversee external debt strategy and ensure timely payments of debt service falling due February 2002 Committee established and working
Structural and data issues    
Acceleration of domestic debt reduction operation, including hosting donors' conference during the first half of 2002 Continuous Discussed at 2003 round table conference
With World Bank assistance, acceleration of program to liquidate the food import and distribution company (EMPA) and the municipal transport operator (TRANSCOR) Continuous Done
Introduction of automatic and transparent pricing mechanism for petroleum products June 2002 Done
Development of improved information systems to track poverty and poverty programs of the government December 2002 Ongoing
Improvement of the quality of key economic and financial sector data, including the real sector, balance of payments, and external debt statistics Continuous Improved balance of payments data


Technical Memorandum of Understanding for the Second Annual Program Under the PRGF Arrangement

1. This memorandum sets out the understandings between the Cape Verdean authorities and the IMF staff regarding the definition of the quantitative performance criteria and indicative targets and reporting requirements under the second annual program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement.

I. Quantitative Performance Criteria And Indicative Targets1,2

A. Government Finances

2. Total government revenue is defined as the sum of all tax and nontax revenues, domestic capital participation, and net lending, cumulative since the start of the calendar year, excluding privatization proceeds and external grants. Tax revenue and nontax revenue are defined in accordance with the Government Finance Statistics Manual (GFS) 1986, Section IV.A.1.

3. The floor on the primary current fiscal balance cumulative from the beginning of calendar-year 2003 constitutes an indicative performance target. The primary current fiscal balance is defined as the difference between total government revenue (defined above in para. 1) and current primary expenditures on a commitment basis. Current primary expenditures equal total government expenditures on a commitment basis less interest obligations on external and domestic debt, capital expenditures, extraordinary expenditures on social emergency measures, and retrenchment payments made as a part of the public enterprise privatization and liquidation reform.

4. For the purposed of this memorandum, privatization proceeds will be understood to mean all monies received by the government from the sale or concessioning of a public company, organization, or facility to a private company or companies, organization(s), or individual(s), as well as any proceeds generated from the liquidation of a public company, less restructuring costs.

5. Reporting requirements. Data on the implementation of the budget compiled by the Ministry of Finance and Economic Planning will be provided on a quarterly basis, to be submitted not later than five weeks after the end of each quarter, including (i) government revenue by category, including external budget support grants; (ii) government expenditure, including primary current expenditure, domestic and external interest payments, and capital expenditure, including domestic capital expenditure and estimates of externally financed capital expenditure; (iii) the gross payment and gross accumulation of domestic payments arrears; (iv) external loan receipts and principal payments; (v) external arrears payments and accumulation; (vi) bank and nonbank financing; (vii) privatization receipts; and (viii) any other revenue, expenditure, or financing not included above.

B. Net Domestic Assets of the Central Bank

6. The ceiling on the cumulative change, from the beginning of calendar-year 2003, in net domestic assets of the Bank of Cape Verde (BCV) constitutes a performance criterion. Net domestic assets (NDA) of the BCV are defined as reserve money minus net foreign assets of the BCV, evaluated at the program exchange rates presented below. The program ceilings for NDA will be adjusted downward (upward) by the cumulative downward (upward) deviations in external debt service and upward (downward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. For purposes of calculating the adjusters, these flows will be valued at current exchange rates. Reserve money comprises bank reserves and deposits of the monetary institutions and private sector with the central bank, as well as cash in circulation.

7. Reporting requirements. The preliminary monthly balance sheets of the BCV and the consolidated commercial banks will be transmitted on a monthly basis, with a maximum delay of five weeks. The definitive version of the monthly balance sheet of the BCV will be provided as soon as available.

C. Net Bank Credit to the Central Government

8. The ceiling on the cumulative change, from the beginning of calendar-year 2003, in net credit to the central government from the banking system constitutes a performance criterion. Net credit to the central government from the banking system (NCCG) is defined as the overall position of the main central government institutions vis-à-vis the banking system--that is, the stock of all outstanding claims on the central government (loans, advances, and all other government debt instruments, such as long-term government securities) held by the central bank and by commercial banks, less all deposits held by the central government with the central bank and with commercial banks, as they are reported monthly by the BCV to the IMF. The INPS (the social security agency) is not included in central government accounts. Net bank credit to the central government excludes claims on the Trust Fund (TCMFs).

9. Claims on the central government held by the central bank comprise the following items: (i) crédito conta corrente OGE; (ii) Tesouro público protocolo; (iii) títulos governo central--obrigações nova serie; (iv) créditos a regularizar m/n e m/e; (v) outros créditos ao governo; and (vi) any other claims, or claims on the central government to be regularized, held by the central bank.

10. Deposits held by the central government with the central bank comprise the following items: (i) depósitos do governo central--depósitos a ordem m/n; (ii) depósitos do governo central--depósitos a ordem m/e; and (iii) outros depositos do governo central.

11. Claims on the central government held by the commercial banks comprise the following items: (i) obrigações do Tesouro; (ii) bilhetes do Tesouro; (iii) protocolos; (iv) empréstimos; (v) outros títulos; (vi) outros créditos; and (vii) any other claims, or claims on the central government to be regularized, held by the commercial banks.

12. Deposits held by the central government with the commercial banks comprise the following items: (i) dep. governo central em m/n--D.G.T.; (ii) dep. governo central em m/n--serviços autónomos; (iii) dep. governo central em m/n--fundos autónomos; (iv ) dep. governo central em m/n--projectos de investimentos; (v) dep. governo central em m/n--fundos de contrapartida; (vi) dep. governo central em m/n--institutos c/autonomia administ. e financeira excepto INPS; (vii) dep. governo central em m/e; and (viii) outros passivos com o governo.

13. The program ceilings for the NCCG will be adjusted downward (upward) by the cumulative downward (upward) deviations in external debt service and upward (downward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. For purposes of calculating the adjusters, these flows will be valued at current exchange rates. In addition, the ceilings for the NCCG will be adjusted downward by the shortfall in cash payments of domestic arrears relative to program assumptions.

14. Reporting requirements. The preliminary monthly balance sheets of the BCV and the consolidated commercial banks will be transmitted on a monthly basis, with a maximum delay of five weeks. The definitive version of the monthly balance sheet of the BCV will be provided as soon as available.

D. Ceiling on Nonconcessional External Debt Contracted or Guaranteed
by the Central Government

15. Under the program, ceilings on medium- and long-term, as well as on short-term, nonconcessional external debt constitute performance criteria. These performance criteria are on a continuous basis. Nonconcessional external debt is defined as debt contracted or guaranteed by the central government with a grant element of less than 35 percent, calculated using currency-specific commercial interest reference rates (CIRRs) published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). Debt rescheduling and debt reorganization are excluded from the limits on nonconcessional external debt. There will be no new nonconcessional external debt contracted or guaranteed by the central government (excluding borrowing from the Fund) in 2003. The definition of short-term nonconcessional external debt excludes normal short-term (less than one year) import-related financing. The Portuguese government's precautionary credit line in support of the exchange rate peg is also excluded from the definition of nonconcessional external debt. In addition, the central government will not guarantee any external debt contracted by state enterprises and will maintain the policy of not guaranteeing private sector external debt. The performance criterion on medium- and long-term nonconcessional external indebtedness applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), 8/24/00) but also to commitments contracted or guaranteed for which value has not been received. With respect to the performance criterion on short-term nonconcessional external indebtedness, the term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), 8/24/00).

16. Reporting requirements. The government of Cape Verde will consult with Fund staff before assuming any liabilities in circumstances where they are uncertain whether the instrument in question falls under the performance criterion. Details of all new external debt, including government guarantees, indicating terms of debt and creditors, will be provided on a quarterly basis within five weeks of the end of each quarter.

E. Net International Reserves of the Central Bank

17. The floor on the cumulative change, from the beginning of calendar-year 2003, in net international reserves (NIR) of the BCV constitutes a performance criterion under the program. The NIR of the BCV are defined as gross international reserves of the BCV net of its short-term external liabilities, calculated at the program exchange rates described below. Gross reserves of the BCV are those that are readily available (i.e., liquid and marketable and free of any pledges or encumberments), controlled by the BCV, and held for the purposes of meeting balance of payments needs and intervening in foreign exchange markets. They include gold, holdings of SDRs, the reserve position at the IMF, holdings of foreign exchange and traveler's checks, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. External liabilities of the BCV comprise liabilities to nonresidents contracted by the BCV with an original maturity of less than a year, any net off-balance-sheet position of the BCV (futures, forwards, swaps, or options) with either resident and nonresidents, any arrears on principal and interest to external creditors and suppliers, and purchases from the IMF. The program floors for the NIR will be adjusted upward (downward) by the cumulative downward (upward) deviations in external debt service and downward (upward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. For purposes of calculating the adjusters, these flows will be valued at current exchange rates.

18. Reporting requirements. A table on the NIR prepared by the BCV will be transmitted on weekly basis, with a maximum delay of two weeks.

F. Nonaccumulation of New Domestic Payment Arrears

19. As part of the program, the government will not accumulate any new domestic payments arrears. This will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations. For programming purposes, a domestic payment obligation to suppliers is deemed to be in arrears if it has not been paid within the normal grace period of 60 days (30 days for government salaries and debt service) or such other period as has been contractually agreed with the supplier after the verified delivery of the concerned goods and services, unless the amount or the timing of the payment is subject to good faith negotiations between the government and the creditor. The outstanding stock of domestic payments arrears at end-December 2002 is estimated at CVEsc 1.1 billion.

20. Reporting requirements. The Ministry of Finance and Economic Planning, through the DGT, will submit on a quarterly basis a detailed table of the stock of domestic payments arrears, including the accumulation, payment, rescheduling and write-off of domestic payments arrears during the quarter. The data are to be provided within four weeks after the end of the quarter.

G. Nonaccumulation of External Arrears

21. As part of the program, the government will not accumulate any new external payments arrears on a continuous basis. This will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations.

22. External arrears are defined as total external debt-service obligations of the government that have not been paid by the time they are due, unless the definition of an arrear has been defined contractually between the government and creditor. External arrears exclude arrears on external debt, pending the conclusion of debt-rescheduling agreements. The outstanding stock of external arrears at end-December 2002 amounted to US$7.5 million.

23. Reporting requirements. Data on (i) debt-service payments and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the Ministry of Finance and Economic Planning, within five weeks of the end of each quarter. In addition, the government will inform the Fund staff immediately of any accumulation of external arrears.

H. Program Exchange Rates and Nonproject Budgetary Support

24. Performance under the program will be assessed based on program exchange rates. The program exchange rates for this purpose are as follows: CVEsc 110.3 = €1; CVEsc 0.55 = Esc 1 (Portuguese escudos); and CVEsc 147.9 = SDR 1.

25. The 2003 program assumes (i) €5 million in nonproject budget support from the European Union in the first quarter; (ii) US$4 million in nonproject budget support from the World Bank in the first quarter; (iii) US$6.2 million in nonproject budget support from the African Development Bank, comprising US$3.2 million in the third quarter and US$3 million in the fourth quarter; (iv) US$2 million from the Netherlands in the fourth quarter; and (v) the repayment of the outstanding Esc 200 million from the Portuguese credit facility drawn in 2002 and the drawing of Esc 1 billion from the Portuguese credit facility in the second quarter, of which 80 percent will be repaid in the fourth quarter.

II. Other Data Requirements for Program-Monitoring Purposes

26. Data on exports and imports, including volume and prices and compiled by the Director of Customs and the BCV, will be transmitted on a quarterly basis within five weeks after the end of each quarter. A preliminary quarterly balance of payments, compiled by the BCV, will be forwarded within five weeks after the end of each quarter.

27. The monthly disaggregated consumer price index for Cape Verde, compiled by the National Institute of Statistics (INE), will be transmitted monthly, within five weeks after the end of each month.

28. Documentation of all measures taken by the government to meet performance criteria or indicative benchmarks under the program will be transmitted to the Fund staff within one week after the day of implementation.


1See Table 2 of the memorandum on economic and financial policies (MEFP).
2The data source used to evaluate the performance criteria on net domestic credit to the central government, net domestic assets of the central bank, and net international reserves will be the Cabo Verde-Panorama Bancario tables prepared monthly by the Bank of Cape Verde (BCV) Statistics and Research Department and forwarded electronically to the IMF African and Statistics Departments.

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