IMF Executive Board Concludes 2010 Article IV Consultation with Cape VerdePublic Information Notice (PIN) No. 10/152
December 2, 2010
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 November 22, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cape Verde .1
Cape Verde sustained strong economic growth during 2006-08, reduced the poverty rate and graduated from the UN least-developed country (LDC) status. During this period, the government built up fiscal buffers, which it used for fiscal stimulus in 2009 to limit the impact of weaker external demand from the global crisis.
The authorities’ economic program of 2006–10 was supported by an arrangement with the IMF under the Policy Support Instrument (PSI). Policy implementation was strong, with some assessment criteria met ahead of schedule. Following the expiration of this program in July 2010, the government has requested that its economic policies for 2011 be supported by a new 15-month PSI program. The government’s medium-term development strategy is set out in the Poverty Reduction Strategy Paper (PRSP), which focuses on further reducing poverty and promoting private sector-led growth.
Leading economic indicators point to a solid rebound in activity, with GDP growth projected at about 5½ percent in 2010. Inflation has edged up to 3 percent in the 12 months to August 2010, mainly because of higher prices in service activities and food. In the first half of 2010, international trade grew moderately and foreign direct investment stabilized. The outlook for service exports in the second half of 2010 is favorable, as tourist establishments report high reservation rates for the high season. Over the medium term, growth rates of exports and Foreign Direct Investment (FDI) are expected to pick up as global conditions improve.
Fiscal policy aims at improving infrastructure while maintaining fiscal sustainability. Fiscal deficits of 6.3 percent of GDP and 13.5 percent of GDP in 2009 and 2010, respectively, reflect the temporary acceleration of the public investment program as counter-cyclical stimulus. The pace of public investment spending is projected to slow over the next couple of years in order to ensure debt sustainability. Fiscal policy continues to support the peg, and domestic debt is kept below 20 percent of GDP.
The Bank of Cape Verde (BCV) raised its policy rate in late 2008 against the backdrop of higher global risk premia associated with the international crisis. Following a decline in global risk indicators, the BCV reduced its policy rate by one percentage point, to 4.25 percent, in January 2010, keeping the spread with the Euribor wide. To support the peg, monetary policy focuses on ensuring gradual reserve accumulation by encouraging inflows of emigrant deposits and restraining private sector credit that would fuel imports.
On the structural front, the government’s reforms focus on reducing the fiscal risk arising from state owned enterprises. The authorities have put the public electricity company, Electra, and the airline company, TACV, on a restructuring plan to address their structural losses.
Executive Board Assessment
Executive Directors commended the Cape Verde authorities on the recent strong macroeconomic performance and the substantial progress toward achieving the MDGs. Directors welcomed the economy’s resilience to recent adverse shocks and the signs of a solid recovery in 2010. Prudent macroeconomic management permitted the implementation of effective counter-cyclical policies and supports the implementation of the government’s medium-term development strategy. The new PSI-supported program will help the authorities build on their strong performance by maintaining macroeconomic discipline through the upcoming election period and further reducing vulnerabilities to economic conditions in trading partners.
Directors supported the authorities’ fiscal stance as being appropriately balanced between the implementation of the ambitious public investment program and the need to safeguard debt sustainability. They stressed the importance of making judicious use of available concessional funds and selecting foreign-financed projects on the basis of pro-growth or pro-poor objectives. Directors welcomed the authorities’ intention to unwind the expansionary fiscal stance starting from 2011 and to scale back foreign borrowing in order to rebuild fiscal policy buffers, while developing a medium-term debt strategy by June 2011. They called for continued reform efforts to strengthen public revenues and to improve the performance of loss-making state owned enterprises.
Directors noted the staff assessment that the escudo remains broadly aligned with its fundamentals while recognizing that the analysis is subject to a high degree of uncertainty. They stressed the importance of prudent fiscal management to support the exchange rate peg and continued structural reforms to foster productivity growth in the private sector to boost competitiveness.
Directors agreed that the monetary stance is appropriate, and noted that, given the fragile global environment, shoring up reserve accumulation by stabilizing remittance inflows is justified. Directors welcomed the authorities’ efforts to improve liquidity management and monetary operations, which should enhance policy effectiveness. They noted that an improved monetary transmission mechanism would allow the authorities to better influence market interest rates, which should be brought in line with the Euribor over time to mitigate the risks of speculative inflows.
Directors were encouraged by the recent measures taken by the BCV to safeguard financial stability. They welcomed the new draft banking law and the improvements to the regulatory and supervisory framework. Directors looked forward to further measures to boost supervisory capacity and to continue progress with the implementation of Financial Sector Assessment Program recommendations.