Statement by IMF Mission to Cape Verde

Press Release No. 06/253
November 14, 2006

The following statement was issued today in Praia by an International Monetary Fund (IMF) staff mission:

"An IMF staff team, headed by Maitland MacFarlan, visited Cape Verde during October 31 to November 14, 2006 for discussions on the first review of the program between Cape Verde and the IMF under the Policy Support Instrument (PSI). The mission met with the Minister of Finance, the Governor of the Bank of Cape Verde, the President of the Statistical Institute, and their officials, together with representatives of commercial banks, trade unions, the energy sector, the economic regulatory agency, and the diplomatic and donor community.

"This relatively new IMF instrument has been developed for countries such as Cape Verde that have made significant progress toward economic stability; do not need or want financial support from the Fund; but would like to seek ongoing IMF advice, monitoring, and endorsement of their economic policies. The PSI for Cape Verde was approved by the IMF Executive Board on July 31, 2006.

"In the mission's view, Cape Verde's economic and policy performance remains strong. With foreign direct investment and tourism inflows rising significantly, and sound agricultural prospects following good rainfall, projections for GDP growth have been revised upwards to nearly 6 percent in 2006 and to 6½ percent in 2007. Inflation has increased during 2006, mainly from the impact of higher international oil prices on domestic energy and water prices, and from temporary supply shortages in a few food items. However, recent developments concerning international oil prices and domestic food supplies have been more encouraging and suggest favorable prospects for 2007. As a result, inflation is expected to fall over the coming year and return to rates close to zero by the end of 2007.

"Fiscal performance remains consistent with the objectives set out at the start of the PSI program-that is, to support overall macroeconomic stability and the exchange rate peg, and to lower domestic debt (as a share of GDP) in order to reduce Cape Verde's vulnerability to exogenous shocks and to create future fiscal space. International reserves accumulated by the Bank of Cape Verde have grown strongly, reflecting prudent monetary and fiscal policies as well as Cape Verde's success in attracting increased inflows of official assistance and private foreign investment.

"In the PSI program, the government sets out its commitment to move forward with a range of structural reforms. Key measures are to strengthen public sector financial management, including through rationalizing the currently complex system of tax exemptions; to reduce fiscal risks, including those that could arise among public enterprises; and to ensure that financial sector development takes place at a careful pace and under institutional and regulatory conditions that are consistent with international best practice.

"The mission team is pleased to see the progress being made on these various fronts. It supports, for example, the government's commitment to run Electra on commercial terms, which will enable this company to undertake much-needed investment to improve efficiency and capacity in domestic electricity and water production. In this regard, the mission team agrees that the automatic mechanism to adjust electricity and water tariffs according to changes in input prices needs to be rapidly implemented, and that the mechanism to adjust retail fuel prices needs to applied automatically and transparently."



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