Statement by IMF Staff Mission to Cape Verde on Second Review of the Policy Support Instrument

Press Release No. 07/53
March 16, 2007

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

"An IMF staff team, headed by Maitland MacFarlan, visited Cape Verde during March 5-16, 2007 for discussions on the second review under the IMF's Policy Support Instrument (PSI). The mission had extensive discussions with the Minister of Finance, the Governor of the Bank of Cape Verde, and their officials. The team also met with the National Assembly finance and budget committee, the Presidents of the Statistical Institute and the Economic Regulatory Agency, and representatives of commercial banks, trade unions, the energy sector, and other participants in the Cape Verde economy.

"The PSI for Cape Verde was approved by the IMF Executive Board on July 31, 2006. The Cape Verde government's program under this relatively new Fund instrument focuses on supporting ongoing macroeconomic stability, growth, and poverty reduction. Key macroeconomic goals include reducing public debt, including domestic debt, and increasing official foreign exchange reserves. The program also includes important structural reforms in such areas as public sector financial management, energy sector regulation, and the private financial sector, notably the growing offshore center. Details about the program can be found on the IMF website www.imf.org.

"In the mission's view, economic and policy performance in Cape Verde remains sound. Supported by strong public and private investment, together with a sharp pickup in tourist arrivals, GDP growth in 2006 appears to have been higher than expected earlier—possibly around 6½ percent. Growth in 2007 is expected to be close to 7 percent and, given the large investment projects in the pipeline, the economic outlook is promising. Inflation is expected to decline substantially in 2007 and reach low single-digit levels by the end of the year.

"The fiscal outturn for 2006 was marked by expenditure restraint and better than expected growth of tax revenues. While domestic borrowing was higher than expected, mainly as a result of delayed revenues from land sales and privatization and lower-than-anticipated dividend payments from public enterprises, this increased borrowing is expected to be unwound in 2007. Overall, the fiscal outlook appears consistent with the program's debt reduction objective and, on the monetary policy front, the build-up of the BCV's official international reserves currently exceeds the program goal.

"The mission is also pleased to see the progress being made with some key structural reforms. These include measures being put in place to prevent accumulation of public sector payment arrears and to strengthen regulation of the energy sector—notably concerning the mechanisms to set and adjust electricity tariffs and to adjust retail fuel prices in line with international market developments. The staff team has also encouraged the authorities to push forward with plans to reform the tax code, including rationalizing the currently complex system of tax exemptions, and to ensure that development of the offshore financial sector takes place at a careful pace and under institutional conditions that are consistent with international best practice."



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