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

Press Release No. 08/155
June 30, 2008

The Executive Board of the International Monetary Fund (IMF) today completed the fourth 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).

In completing the review, the Board granted a waiver for the non-observance of an assessment criterion related to application of the mechanism for setting and adjusting electricity, water, and fuel prices, given the strength of the authorities' policies and the corrective measures taken.

Cape Verde's PSI is designed to enhance the sustainability of growth and development by maintaining a stable macroeconomic environment and moving forward with structural reforms. It is also expected 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.

Following the Executive Board's discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Cape Verde's impressive economic performance in recent years reflects both prudent macroeconomic management and economic reforms. Good policies have catalyzed investments and export growth, especially in the tourism sector—breaking past dependence on aid and remittances—leading to robust growth and moderate inflation.

"Continuation of prudent fiscal policy will be critical to safeguarding the exchange rate peg and enhancing resilience against shocks. The PSI target for domestic debt was met two years ahead of schedule, helping to build up foreign reserves faster and support the exchange rate peg. This success was due largely to restraint on current spending, improved public financial management, and robust tax revenues, reflecting improvements in tax administration. Going forward, the prudent 2008 budget is consistent with further reducing domestic debt. The forthcoming medium-term fiscal framework should help to anchor the authorities' expenditure and tax reform plans, preserve the low risk of debt distress, and help accumulate reserves to support the exchange rate peg and buffer shocks.

"Further strengthening the financial system will be important to safeguard its stability and enhance Cape Verde's growth prospects. The authorities are making progress in strengthening financial sector regulation and supervision, including the broad alignment of prudential requirements for both on- and offshore banks. Strong oversight of banking system soundness would help attract more diverse sources of financing and reduce dependence on nonresident deposits. The Central Bank of Cape Verde is working to strengthen the set of financial soundness indicators. The forthcoming FSAP should strengthen the authorities' hand and enable them to better understand real and financial sector linkages.

"Structural reforms to make the economy more flexible will be key to enhancing competitiveness and to sustaining high growth in the long term. Cape Verde's export base remains narrow. The ongoing tourism boom offers a window of opportunity to facilitate private sector development and enhance economic diversification. Diversifying the economy continues to be an important strategic goal to increase resilience to shocks.

"Cape Verde has made major strides in the last several years in achieving the key objectives set out in the first PRSP and in improving the well-being of its citizens. The PRSP-II sets out Cape Verde's medium-term goals and provides a comprehensive and integrated strategy for achieving them. Implementation of the PRSP-II would benefit from adequately costed expenditure plans for key priorities and an improved monitoring and evaluation system," Mr. Kato said.

The IMF's framework for PSIs is designed for low-income countries (and small island states) 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).



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