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

Press Release No. 07/89
May 8, 2007

The Executive Board of the International Monetary Fund (IMF) has completed the second 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 intended to help the country reduce macroeconomic risks, provide a margin for safety against shocks, and prepare for a possible longer-term decline in access to concessional external financing. Key measures are directed to reducing public debt, building up international reserves, improving public financial management, and strengthening financial sector and energy sector regulation.

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, Mr. Murilo Portugal, Deputy Managing Director and acting Chair, said:

"Cape Verde continues to demonstrate strong economic performance, supported by the authorities' commitment to maintain sound macroeconomic policies and to push ahead with a wide range of structural reforms. Growth is being reinforced by significant increases in foreign direct investment, especially in the tourism sector. Reflecting this favorable performance, the growth estimates for 2006 and 2007 have been revised up. Inflation is declining and is expected to return to low single-digit levels by the end of this year.

"Fiscal and monetary policies are on track to meet or surpass objectives of the program under the Policy Support Instrument (PSI)—notably, the reduction in domestic debt as a share of GDP and the build-up of official foreign exchange reserves.

"The government is preparing a number of important reforms to improve public sector financial management, including measures to strengthen budget implementation, audit processes, and the tax codes—including a much-needed streamlining of tax exemptions. Also of critical importance is the full implementation of procedures being put in place to end the problem of public sector payment arrears. In addition, the government's plans to develop a medium-term public investment plan, including for the state-owned enterprises, will help with the prioritization of investment projects and the identification of financing options.

"To safeguard Cape Verde's good reputation, it is important for the authorities to push ahead with reforms to strengthen financial sector regulation and supervision, including in the offshore sector and with regard to provisions for anti-money laundering and combating the financing of terrorism (AML/CFT). Financial sector development needs to be undertaken prudently and in conformity with international best practice.

"The implementation earlier in 2007 of the automatic adjustment mechanism for utility tariffs is a welcome development, as this will support energy sector growth and reduce fiscal risks. To complement this measure, the mechanism to determine base tariff levels should be applied by mid-2007 as planned, and adjustments in retail fuel prices need to take place automatically and transparently," Mr. Portugal.



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