IMF Executive Board Completes the First Review Under the Policy Support Instrument for Cape Verde

Press Release No. 07/13
January 24, 2007

The Executive Board of the International Monetary Fund (IMF) has completed the first review under a three-year Policy Support Instrument (PSI) for Cape Verde. The PSI was approved on July 31, 2006 (see Press Release No. 06/172).

Cape Verde's PSI is designed to help the country respond to the opportunities and challenges associated with its graduation from UN least-developed country (LDC) status in 2008. The program seeks to reduce macroeconomic risks, provide a margin of safety against exogenous shocks, and address the prospect of a longer-term decline in highly concessional external support.

The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program (see Public Information Notice No. 05/145).

Following the Executive Board's discussion of Cape Verde, on Monday, January 22, 2007, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"Cape Verde's economic performance remains strong, supported by prudent macroeconomic policies and structural reforms being implemented. Economic growth, already quite robust, is being reinforced by significant increases in tourism and foreign direct investment; and inflation is expected to remain low in the medium term. Fiscal and monetary policies are on track to substantially reduce domestic debt and boost official foreign exchange reserves.

"The government's budget for 2007 seeks to create fiscal space to meet potential future spending pressures. An essential element of the fiscal stance will be to end the problem of arrears accumulation by public sector agencies.

"Ensuring a stable supply of electricity and water at reasonable cost is crucial if Cape Verde is to realize its medium-term economic goals. Accordingly, the agreement reached between the electricity and water utility and the Economic Regulatory Authority on an automatic adjustment mechanism for electricity and water tariffs is welcome. The mechanism for adjusting retail fuel prices also needs to ensure that domestic prices reflect import prices. In general, public enterprises need to operate on commercial terms.

"As highly concessional financing may become increasingly difficult to secure after Cape Verde graduates from UN least-developed-country status in 2008, new external financing options may need to be developed. To ensure that this increased financing flexibility does not jeopardize long-term fiscal or debt sustainability, Cape Verde's institutional capacity for project appraisal and implementation, debt management, and debt sustainability analysis will need to be strengthened," Mr. Portugal said.



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