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

Press Release No. 08/338
December 22, 2008

The Executive Board of the International Monetary Fund (IMF) today completed the fifth 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 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. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

"Cape Verde's prudent economic management in recent years is now paying dividends, putting the country in a position of strength to face the current global economic challenges. Faster-than-planned reduction of domestic debt and buildup of official reserves provide buffers to absorb shocks. The effects of the global financial turmoil and slowdown on Cape Verde have been relatively contained: growth continues to be solid, inflation is expected to remain in single digits, and the banking system remains stable. But it will be important to monitor the situation closely for possible indirect adverse effects on growth and the balance of payments in the medium term stemming from reductions in remittances, tourism receipts, and foreign direct investment.

"The authorities' revised macroeconomic framework is appropriate, providing for the judicious use of buffers to absorb external shocks. The authorities recognize that continued fiscal restraint and strengthened monetary management will be critical to safeguard the exchange rate peg and increase resilience to shocks.

"The 2009 budget is appropriate. The greatly reduced level of debt achieved in recent years allows fiscal policy to support economic activity, while preserving debt sustainability. The planned acceleration of public investments in infrastructure will help to remove bottlenecks to growth. The authorities' plans to continue strengthening public debt and financial management will help keep the risk of debt distress low.

"The recent measures taken by the Bank of Cape Verde to strengthen monetary management have stemmed the decline in official reserves. The Bank of Cape Verde is committed to realigning interest rates promptly in response to market developments, as needed to smooth short-term capital flows, consistent with the exchange rate peg. The upcoming Financial Sector Assessment Program analysis and recommendations should help the authorities to continue to strengthen financial system regulation and supervision, thereby preserving financial stability," Mr. Portugal said.



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