IMF Executive Board Concludes 2012 Article IV Consultation with Cape Verde

Public Information Notice (PIN) No. 13/46
April 23, 2013

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 March 8, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cape Verde.1

Background

After recovering in 2010, Cape Verde’s growth slowed in 2011 and 2012, reflecting the difficult external environment and weak domestic demand. Growth is estimated at 4.3 percent in 2012, with foreign direct investment (FDI) having fallen significantly and confidence indicators across several sectors waning. However, tourism has remained resilient and remittances have held up well. The overall balance of payments is expected to move into surplus in 2012, aided by a significant narrowing of the current account deficit owing to strong tourism receipts and weaker imports. Accordingly, reserves are estimated to have stabilized at an estimated 3.8 months of current year imports (staff estimate 3.3 months of prospective imports). This outturn was aided by an adjustment of fiscal policy in 2012, particularly capital spending, in support of the monetary policy tightening that began in late 2011. Average inflation was well contained in 2012 at 2½ percent. Fiscal deficits have increased over recent years as the authorities have ramped up public investment on infrastructure, partly as a countercyclical policy response to the global crisis. Debt service indicators remain sustainable, although public debt levels have continued to increase, reaching elevated levels.

Cape Verde is likely to face a more difficult external environment in 2013, especially with near zero growth forecast in the euro area. Growth is expected to slow to 4.1 percent. Competition in tourism is intensifying as North African markets recover. The growth of private remittances is slowing, driven by economic stagnation in euro area countries. The prospects for higher private capital flows, including FDI, are dimmed by weaknesses in Europe. Likewise, concessional assistance flows are also under stress with the fiscal adjustment underway in Europe.

On the structural front, government’s reforms focus on rebuilding the tax administration and reforming tax policy, improving oversight over the financial system, strengthening monetary operations, and enhancing the governance of state owned enterprises to reduce fiscal risks and improve their service delivery to help boost competitiveness of the economy.

Executive Board Assessment

Executive Directors commended the authorities’ strong track record of prudent macroeconomic management, which has increased the economy’s resilience to shocks, supported economic growth, and advanced progress toward the Millennium Development Goals. They stressed that the difficult external outlook and fiscal and external vulnerabilities call for continued efforts to strengthen macroeconomic buffers, and to foster inclusive growth while preserving external sustainability.

Directors commended the authorities’ efforts to upgrade the infrastructure, using concessional assistance, but noted that the rising public debt could pose risks to debt sustainability. They therefore welcomed the authorities’ intention to undertake medium-term fiscal consolidation beginning in 2013, and advised that it be implemented in a growth-friendly manner. Directors looked forward to the planned reform of tax policy and tax administration to reverse the recent decline in tax revenue relative to GDP. They encouraged restraint on capital spending and more focus on improving the quality of public investment. They also pressed for rationalization of current spending and reforms to improve the operational efficiency and financial position of loss-making state-owned enterprises.

Directors agreed that the current tight monetary stance is appropriate, given the need to further increase reserves to a more comfortable level. They encouraged measures to strengthen the monetary transmission mechanism, including more active liquidity management, better liquidity forecasting, and reforms to increase the efficiency of the interbank market and develop the government securities market.

Directors noted staff’s assessment that the real effective exchange rate is broadly aligned with economic fundamentals. While higher reserve coverage would support the peg, Directors also called for steadfast pursuit of structural reforms to improve the business environment and boost productivity and competiveness. They welcomed in this regard the Third Growth and Poverty Reduction Strategy, which provides a sound basis for higher and more inclusive growth.

Directors welcomed the recent measures taken to safeguard financial stability, including the drafting of new banking legislation, improvements to the regulatory and supervisory framework, and the establishment of a Financial Stability Committee. In light of rising non-performing loan ratios, they encouraged the authorities to continue to strengthen supervisory capacity and to accelerate implementation of the FSAP recommendations.


Cape Verde: Selected Economic and Financial Indicators, 2011–16
 
  2011 2012 2013 2014 2015 2016

 

  Est. Projections
 

National accounts and prices

           

Real GDP

5.0 4.3 4.1 4.5 4.7 5.0

Real GDP per capita

3.6 2.9 2.7 3.1 3.3 3.6

GDP deflator

3.9 3.5 3.5 3.1 3.1 3.0

Consumer price index (annual average)

4.5 2.5 4.0 3.3 2.8 2.5

Consumer price index (end of period)

3.6 4.1 3.5 3.1 2.5 2.5

External sector

           

Exports of goods and services

17.3 10.7 9.0 7.6 7.9 7.3

Of which: tourism

26.5 10.6 6.5 9.2 9.1 9.0

Imports of goods and services

17.9 0.1 10.4 0.5 0.1 2.3

Money and credit 1

           

Net foreign assets

-4.2 0.9 1.4 0.3 2.1 1.1

Net domestic assets

6.5 3.8 5.1 5.5 5.3 6.1

Net claims on the central government

3.0 1.2 0.8 0.5 0.2 0.2

Credit to the economy

6.3 1.7 4.3 5.8 5.8 6.9

Broad money (M2)

2.2 4.6 6.5 5.8 7.5 7.1

Reserve money (M0)

-1.3 4.3 1.6 1.4 1.8 1.7

Savings and investment

           

Domestic savings

20.5 21.8 21.9 23.2 24.6 25.9

Government

2.8 0.1 2.3 -3.1 -2.2 1.4

Private

17.7 21.7 19.6 26.3 26.8 24.5

National investment

36.5 32.9 35.2 34.5 33.0 32.0

Government

9.9 7.6 9.9 8.4 5.8 4.0

Private

26.6 25.3 25.3 26.1 27.2 28.0

Savings-investment balance

-16.0 -11.1 -13.2 -11.4 -8.3 -6.1

Government

-7.1 -7.5 -7.5 -11.5 -8.0 -2.5

Private

-8.9 -3.6 -5.7 0.2 -0.3 -3.5

External sector

           

External current account (excluding official transfers)

-19.6 -13.5 -15.2 -11.4 -8.3 -6.1

External current account (including official transfers)

-16.0 -11.1 -13.2 -11.4 -8.3 -6.1

Overall balance of payments

-2.3 1.5 1.1 0.3 1.9 1.3

Gross international reserves (months of prospective imports of goods and services)

3.2 3.3 3.3 3.4 3.6 3.8

Gross international reserves (months of current year imports of goods and services)

3.2 3.8 3.3 3.4 3.7 3.9

Government finance

           

Revenue

25.0 21.8 24.9 25.6 25.5 24.3

Tax and nontax revenue

22.2 19.4 22.1 21.9 22.4 22.4

Grants

2.8 2.4 2.8 3.6 3.1 1.9

Expenditure

32.3 29.3 32.5 31.5 27.6 24.1

Overall balance (excl. grants)

-10.1 -9.9 -10.4 -9.6 -5.2 -1.7

Overall balance (incl. grants)

-7.3 -7.5 -7.6 -5.8 -2.2 0.2

External financing

9.4 9.1 11.8 8.2 5.3 1.0

Domestic financing (incl. onlending)

-0.7 -1.6 -4.2 -2.4 -3.1 -1.2

Errors and omissions

-1.4 0.0 0.0 0.0 0.0 0.0

Public debt stock and service

           

Total nominal government debt

77.3 81.0 88.6 92.2 92.1 85.6

External government debt

56.1 59.8 67.4 71.4 72.0 68.2

Domestic government debt

21.2 21.2 21.2 20.8 20.0 17.4

External debt service (percent of exports of goods and services)

4.2 4.6 4.6 4.8 4.6 4.3

Memorandum items:

           

Nominal GDP (billions of Cape Verde escudos)

150.8 162.8 175.4 189.1 204.2 220.8

Gross international reserves (€ millions, end of period)

263.3 300.0 302.7 308.3 342.6 369.5
 

Sources: Cape Verdean authorities; and IMF staff estimates and projections.

1 Adjusted for data inconsistency in December 2011.


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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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