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

Press Release No. 09/449
December 8, 2009

The Executive Board of the International Monetary Fund (IMF) completed on December 7 the seventh review under the Policy Support Instrument (PSI) for Cape Verde. The PSI for Cape Verde was approved on July 31, 2006 (see Press Release No. 06/172) and was extended by one year on June 19, 2009 (See Press release No. 09/222).

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. Specific attention is given to reducing fiscal risks and giving Cape Verde a margin of safety to protect the economy against exogenous shocks.

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

“ Prudent economic management and strong fundamentals have enabled Cape Verde to weather the global crisis well. Growth remains solid, inflation has returned to low levels, and domestic debt continues to decline. The global financial crisis has had little impact on the financial sector, and despite a moderate decline, international reserves remain adequate, partly because of the SDR allocation.

“The fiscal deficit in 2010 will be driven by investment needs and social spending, using the borrowing space. The planned acceleration of public investments in infrastructure, financed externally on long and concessional terms, is consistent with external stability, and should have a positive impact on medium-term growth and competitiveness.

“ The risk of debt distress in Cape Verde remains low. Given the rapid increase in the debt ratios, a reduction in the fiscal deficit beyond 2010 is warranted, and a commitment to keep the deficit low over the medium term would dispel any market concerns about fiscal sustainability. Steps are being taken to strengthen revenue collection and broaden the tax base. Continued fiscal restraint and prudent monetary management are critical to safeguarding the exchange rate peg and increasing resilience to shocks.

“ Cape Verde’s monetary framework continues to be appropriate. Given the pressure on international reserves, the increase in the reserve requirement in the short term was necessary. Going forward, there is room to lower interest rates gradually as international country risk premiums decline. Over the medium term, it will be important to continue to improve the monetary policy transmission mechanism and to develop the domestic financial market. The authorities have made considerable progress in implementing the FSAP recommendations to improve financial sector regulation and supervision, and are encouraged to continue their efforts to enact the new banking law in 2010”, added Mr. Portugal.

The IMF's framework for PSIs is designed for PRGF-eligible 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. PSIsupported 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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