Press Release No. 09/126

Press Release No. 09/126
April 14, 2009

An International Monetary Fund (IMF) mission, led by Mr. Lamin Leigh, visited Cape Verde during April 3-15, 2009. The purpose of the visit was two-fold: to conduct the sixth review of the Policy Support Instrument (PSI), and to negotiate a one-year extension of the PSI at the request of the Cape Verde authorities. The current three-year PSI arrangement was approved by the IMF Executive Board in July 2006 and is due to expire in July 2009. At the conclusion of the visit, Mr. Leigh made the following statement:

"The mission held extensive and productive discussions with government officials, representatives of the private sector and the Finance Committee of the National Assembly, and would like to thank the authorities for their excellent cooperation. Cape Verde’s economic and policy performance remains strong and so far the impact of global shocks remain manageable thanks to sizable buffers built in recent years through prudent macroeconomic management, especially the fiscal space created in the last three years. The sixth PSI review discussions focused on how best to execute the 2009 budget while preserving the external position against the background of the current global economic difficulties; the authorities’ medium-term fiscal framework, and measures to strengthen public financial and debt management and the financial sector.

“Looking ahead, the ongoing global economic difficulties will pose challenges for the Cape Verde economy. While the moderation in GDP growth is likely to stem from the projected global slowdown in tourism and Foreign Direct Investment (FDI) flows, countercyclical fiscal policy will partly mitigate their impact and support economic activity. Inflation would continue to decline to low single digits consistent with the peg to the euro and the high pass-through of international prices in this highly open economy. The outlook is subject to large margins of error given the uncertainty about both the depth and duration of global recession and the resilience of Cape Verde’s economy to previous global economic downturns.

“The mission supports the fiscal stimulus measures that the government has taken to support economic activity in a year when net external demand and private sector growth are expected to weaken. The mission also welcomes the government’s plans to protect social spending in the budget, as the global crisis is likely to hit hardest the poor and vulnerable segments of the population. Monetary management which smoothes short term capital flows continues to be broadly appropriate. Thus, the exchange rate peg continues to be supported by domestic policies and serves Cape Verde well as an anchor for financial stability. Steady progress is also being made in the implementation of structural reforms in particular on improving public debt and financial management and strengthening the financial system.

“IMF staff will continue its close policy dialogue with the Cape Verde government with a view to presenting the sixth review under the PSI for discussion to the IMF Executive Board in June.”