## 1. Recent Economic Developments ## Source details **Canonical URL:** [1. Recent Economic Developments](https://www.imf.org/-/media/files/publications/cr/2018/cr18104.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18104.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18104.pdf.json) --- ### A. Recent developments and macro outcomes - Growth and drivers: - 2017 GDP growth is estimated at 4 percent compared to 3.8 percent in 2016 and an average of 0.9 percent during 2012–15. - Recovery drivers: Double digit-growth in tourist arrivals; recovery in credit to the economy; stronger consumer and business confidence. - Real GDP growth series (selected): 0.6 (2014); 1.0 (2015); 3.8 (2016); 4.0 (2017 prelim.); 4.3 (2018 proj.); 4.0 (2019–2023 proj.). - Prices and external sector: - Average inflation: 0.8 percent in 2017. - Current account: estimated deficit widened to 8.8 percent of GDP in 2017; mostly financed by FDI. - International reserves: slightly fell to €533 million (5½ months of prospective imports) in 2017. - Fiscal outturns and public debt: - 2017 budget deficit is estimated at 3 percent of GDP (down from 3.1 percent in 2016). - Total financing needs in 2017 estimated at 4.2 percent of GDP (from 5.6 percent in 2016). - Public debt fell to 126 percent of GDP in 2017, after peaking at 129.5 percent in 2016. - Note on non-financial asset transaction: transfer of part of social housing stock from IFH equivalent to 2.5 percent of GDP; without this operation the budget deficit would have been 0.5 percent of GDP. - Credit, ratings, and reserves: - Credit to the economy recovered, reaching 5.3 percent annual growth in November 2017. - S&P affirmed “B” and removed the negative outlook in May 2017. - Migrant deposits: 2017 annual flow equivalent to 2.3 percent of GDP; stock represented 38 percent of total deposits (37 percent of GDP). ### B. Authorities’ views and social indicators - Authorities expect reforms to raise potential output growth; Ministry of Finance expected output to expand by more than 5 percent in 2018 (budget view). - Poverty and inequality (National Statistics Institute): - Incidence of poverty fell to 35 percent in 2015 from 57 percent in 2001. - Extreme poverty fell to 11 percent in 2015 from 30 percent in 2001 using national extreme poverty line of €1.2 per person per day in 2015. - Consumption-based Gini fell to 0.42 in 2015 from 0.53 in 2001. ### C. Data and past program context - Two PSIs supported policies during 2006–12; sizable fiscal consolidation under first PSI (2006-10); weaker performance under second PSI. - Implementation of advice on mitigating fiscal risks from SOEs has been weaker. - Data provision: broadly adequate for surveillance; improvements recommended in national accounts, government finance, and external sector statistics. --- ### 2. Medium-Term Outlook and Risks ### A. Staff projections (baseline) - Growth and inflation: - 2018 output growth expected to accelerate to 4.3 percent, then stabilize at around 4 percent over the medium term. - Average inflation projected to remain stable at about 1 percent in near term and increase gradually to stabilize at about 2 percent over the medium term. - External and reserves: - 2018 current account deficit projected to widen to 9.5 percent of GDP and remain at about 10 percent of GDP over the medium term. - International reserves coverage: expected to remain at about 5½ months of prospective imports in 2018 and then gradually decline over the medium term, below the level considered adequate by staff. - Public debt: - Public debt levels: projected to fall only modestly over the medium term. - Staff projection for 2018: public debt projected to decline to 124.7 percent of GDP; total financing needs projected at 8.9 percent of GDP; deficit projected at 3.2 percent of GDP. - Under more prudent assumptions than authorities’ MTFF, public debt would remain at about 125 percent of GDP by 2021 (instead of falling to 113 percent as projected in MTFF). ### B. Risks - Downside global risks: weaker-than-expected global growth; tighter global financial conditions; loss of correspondent banking relations (CBRs). - Domestic risks: wavering fiscal consolidation; delays in SOE restructuring; delays in structural reforms to increase productivity. - Upside possibilities: faster tourism growth from improved infrastructure and stronger European recovery; stronger linkages between tourism and domestic economy could accelerate non-tourism sector growth. --- ### 3. Debt Sustainability and External Stability ### A. Debt Sustainability Analysis (DSA) findings - Risk rating: Risk of external debt distress assessed as high (unchanged). - External debt composition and characteristics: - 75 percent of total public debt is external and highly concessional (text summary). - PV of external debt-to-GDP breaches the 50 percent threshold for high-risk strong policy performers and expected to fall below 50 percent only by 2032 under the staff baseline. - Indicators and projections (selected): - Public debt (percent of GDP): 115.9 (2014); 126.0 (2015); 129.5 (2016); 126.0 (2017); 124.7 (2018); 126.7 (2019); 126.1 (2020); 124.6 (2021); 122.7 (2022); 120.9 (2023). - PV of external public debt (percent of GDP, selected): 61.4 (2014 memo); 65.0 (2015); 73.3 (2016); 66.9 (2017); 67.4 (2018); 67.3 (2019); 65.9 (2020); 64.0 (2021); 61.7 (2022); 60.5 (2023). - Debt service and gross financing needs are sensitive to growth and exchange rate shocks; debt-service-to-revenue ratio would remain below threshold through 2037 under baseline but vulnerabilities elevated. - Stress tests: most extreme stress corresponds to Combination shock; one-time 30 percent nominal depreciation in 2018 (B6) would breach some ratios. ### B. External stability - External position: moderately weaker than implied by fundamentals and desirable policy settings, but risks appear low (Annex III). - Real effective exchange rate: broadly in line with fundamentals; REER misalignment for 2017 estimated at 4.4 percent (overvaluation) in one model. - Reserve adequacy: reserves remain adequate but projected to decline; staff target to maintain coverage around 5½ months of prospective imports given economy characteristics. - Structural competitiveness issues: concerns about non-price competitiveness; need to increase productivity of human and physical capital; improve business environment (access to financing, reduce bureaucratic inefficiencies, improve education). --- ### 4. Policy Discussions, Priorities, and Recommendations ### A. Overall policy priorities - Development priorities: promote inclusive economic growth, reduce vulnerabilities, and implement ambitious structural reform agenda. - Key policy imperatives: - Significantly reduce public debt. - Protect the peg and strengthen the financial system. - Implement structural reforms to promote private sector development and investment while protecting the most vulnerable. ### B. Staff’s recommended fiscal strategy (objectives and measures) - Main fiscal challenge: address high public indebtedness and reduce fiscal risks. - Staff preferred strategy: ambitious and sustained fiscal adjustment while protecting the peg and leveraging favorable conditions. - Targets and outcomes aimed: - Keep public gross financing needs below 14 percent of GDP. - Reduce risk of external debt distress to moderate by 2023 (bring external public debt below LIC DSF threshold applicable to high capacity countries: 55 percent of GDP from July 1, 2018). - Open room for faster growth in credit, crowd-in private sector, boost investor confidence, accelerate medium-term growth to 5 percent, put public debt on downward path, facilitate external adjustment, and keep reserve adequacy at about 5½ months of prospective imports. - Proposed measures (combination of revenue and expenditure): - Increase VAT rate to 17 percent. - Cap expenditure on goods and services at 4 percent of GDP (average in 2013–17). - Cap net acquisition of non-financial assets at 3 percent of GDP (average in 2016–17). - Contain growth in public employment. - Limit issuance of debt guarantees to contain fiscal risks. ### C. Authorities’ MTFF and authorities’ stance - Authorities’ MTFF aims at fiscal consolidation to offset projected decline in grants and keep public debt on a downward trend; MTFF relies on optimistic growth assumptions, revenue administration gains, speedy SOE restructuring, and imprecise expenditure rationalization plans. - Authorities prefer revenue administration and expenditure containment over raising taxes; reported revenue administration raised tax revenues to 21.1 percent of GDP in 2017 from 17.5 percent in 2014. - Authorities intend a partial freeze of 10 percent in the goods and services budget for 2018 and plan to add human and IT resources to revenue administration in 2018. ### D. Sovereign guarantees and SOE restructuring - Outstanding stock of sovereign guarantees at end-September 2017 estimated at 7.6 percent of GDP (most guarantees on domestic borrowing). - Government intends to restructure all SOEs with priority to TACV, IFH, and Electra. - Restructuring costs and guarantees: - Government may need to assume up to 6 percent of GDP in debt obligations for TACV (amounts being renegotiated; authorities expect to reduce this amount by at least half). - 2018 budget envisages issuance of sovereign guarantees to SOEs equivalent to 5.3 percent of GDP, one third of which would be to TACV, IFH, and Electra. - Government support to SOEs expected to decline significantly by 2020 following successful restructuring of TACV, IFH, and Electra. ### E. Institutional and structural reforms (recommended) - SOE governance and oversight: - Rapidly restructure loss-making SOEs at least cost to the budget and prevent re-emergence of SOE fiscal burdens. - Develop mechanisms to oversee SOE financial performance and borrowing plans. - Integrate SOEs into budget preparation processes. - Create mechanisms to detect deviations from planned performance for timely corrective action. - Implement new organic budget law to strengthen budget execution, broaden coverage to the non-financial public sector, and introduce a debt ceiling. - Revenue administration and tax policy: - Recent reforms successful; further measures include revisiting existing tax expenditures and resisting pressures to grant additional tax exemptions. - Structural reforms to boost growth and inclusion: - Strengthen labor market efficiency and flexibility. - Improve quality and relevance of education and vocational training. - Improve business environment: access to financing, reduce bureaucratic inefficiencies. - Protect social spending and strengthen targeting of social programs in near term. --- ### 5. Monetary Policy, Financial Sector, and Contingency Planning ### A. Monetary policy and liquidity management - BCV actions and stance: - BCV maintained accommodative stance; policy rate cuts cumulate to 425 bp since August 2014; in June 2017 cut by 200 bp to 1.5 percent. - Measures adopted in June 2017 to strengthen monetary policy transmission aimed to shorten current transmission lag of about six months. - Excess liquidity accumulated to the equivalent of 10.8 percent of GDP in November 2017. - Staff recommendations: - Tighten monetary policy if fiscal consolidation reverses and pressures on reserves emerge. - Monitor evolution of migrant deposits as conditions normalize in the US and Euro zone. - Narrow overnight interest rate corridor to a maximum 150–200 basis points and establish a symmetrical corridor linked to the key policy rate. - Strengthen liquidity management capacity and develop plan to address high excess liquidity. - Aim to maintain international reserves coverage above five months of prospective imports; LIC/MIC framework estimate about four months but higher desirable for Cabo Verde. - Develop contingency plans for potential surge in capital outflows following adoption of new foreign exchange law; strengthen draft BCV organic law to buttress operational independence and limit budget financing. ### B. Financial sector vulnerabilities and policy advice - NPLs and legacy loans: - Non-performing loans represent about 17.3 percent of total loans; legacy loans from 2006-08 real estate projects contribute about 70 percent of NPL stock. - Excluding legacy loans, NPLs represent 6.3 percent of total loans. - BCV extended period to liquidate repossessed assets in 2013-16 from 2 to 5 years in February 2015; these assets must start being liquidated or written off banks’ balance sheets in 2018. - Banking sector soundness (selected indicators): - Capital adequacy ratio without write-off (percent): 17.0 (text table). - Additional provisioning required to write-off legacy loans: 2,856 (million CVE). - Capital after write-off of legacy loans: 13,666 (million CVE). - Risk weighted assets without legacy loans: 84,402 (million CVE). - Capital adequacy ratio with write-off of legacy loans (percent): 16.2. - Stress test outcomes and recommendations: - Under sectoral credit shocks average CAR would decline by 1.7 percentage points but no bank undercapitalized; default by three largest debtors would reduce capital by 12.8 percent (1.4 percent of GDP) and CAR decline by 6.2 percentage points, pushing 2 banks below minimum. - Staff recommendations: resolve legacy NPLs as priority; avoid further forbearance of write-off requirements; implement asset quality review recommendations; improve loan portfolio assessment, collateral valuation, and asset classification; increase bank capital buffers; strengthen collateral repossession, create central registry of movable collateral, improve credit information system, implement financial education for SMEs. - Avoid initiatives that encourage bank lending if they generate contingent fiscal liabilities given high public debt. - Correspondent banking relationships (CBRs): - Active correspondent banks down to 33 in 2017 from 38 in 2015; value of payment flows declined by 27 percent between 2014 and 2016. - Staff: BCV and commercial banks should assess loss of CBRs, develop contingency plans, establish contacts with correspondent banks and supervisors, improve AML/CFT to FATF standard, and implement FATCA and agreed tax good governance standards with the EU. --- ### 6. State-Owned Enterprises (SOEs): Size, Risks, and Restructuring ### A. Exposure and fiscal significance - 23 active SOEs across transport, real estate, energy and water, pharmaceutical, and infrastructure. - The 16 largest SOEs had total liabilities equivalent to 46 percent of GDP; 6.6 percent of GDP guaranteed by central government. - Domestic liabilities about 12 percent of GDP comprising: tax and social security arrears 1.6 percent of GDP; loans to banking sector 4.2 percent of GDP; domestic capital market 6.2 percent of GDP. - Aggregate SOE liabilities at end-2016: total liabilities in excess of 36 percent of GDP; sovereign guarantees equivalent to 6.3 percent of GDP. - In 2016 the three largest loss-making SOEs’ losses reached 1.6 percent of GDP. ### B. The three largest loss-making SOEs: TACV, IFH, Electra (selected facts) - TACV (Transportes Aéreos de Cabo Verde): - August 2017: domestic routes transferred to Binter Cabo Verde; government received 30 percent participation in Binter Cabo Verde. - October 2017: one-year management contract with Icelandair to operate international routes and prepare TACV for privatization in 2018 after valuation. - Loan of €13.5 million contracted to finance workforce retrenchment costs. - TACV current liabilities €100 million (6 percent of GDP); government expects to reduce them by at least 50 percent through renegotiation. - Fiscal cost for 2017-18 estimated at about 2.2 percent of GDP. - IFH (Imobiliária, Fundiária e Habitat, S.A): - 2017: Casa Para Todos program restructured; Class A houses transferred to municipalities and central government; Class B and C commercialized. - Fiscal cost for 2017-18 estimated at 0.6 percent of GDP. - Transfer of part of social housing stock from IFH equivalent to 2.5 percent of GDP noted earlier. - Electra: - Mandated to improve efficiency and prepare for privatization; revenue protection program implemented. - Distribution and transmission losses: 27 percent in 2016, down from 29 percent in 2015. - Restructuring to unbundle water and energy operations; privatization planned for 2018/2019. - Fiscal cost for 2017-18 estimated at 0.3 percent of GDP. ### C. Institutional measures and risks - Measures in progress: creation of SOE oversight unit in July 2016; monitoring platform; revision of legal framework and management contracts; review of PPP law; instruments to monitor concessions; technical training by World Bank. - Risk ratings (selected SOEs): TACV — High; IFH — High; ELECTRA — Moderate; ASA, ENAPOR, EMPROFAC — Low. - Staff view: accelerate SOE restructuring to eliminate need for government support and contain contingent liabilities. --- ### 7. Risk Assessment Matrix — systemic risks and policy responses (selected) - Weaker-than-expected global growth: Relative Likelihood: High; Impact: Medium/High; Policy Response: Accelerate structural reforms. - Tighter or more volatile global financial conditions: Relative Likelihood: High; Impact: Medium; Policy Response: Tighten monetary policy; accelerate productivity-enhancing reforms. - Reduced financial services by correspondent banks (CBRs): Relative Likelihood: Medium; Impact: High; Policy Response: Develop contingency plans; strengthen AML/CFT. - Wavering fiscal consolidation and SOE restructuring: Relative Likelihood: Medium; Impact: High; Policy Response: Reduce current spending; postpone non-priority infrastructure; reinvigorate SOE reforms. - Delays in productivity measures: Relative Likelihood: Medium; Impact: Medium; Policy Response: Accelerate structural reforms. --- ### 8. Selected key indicators and projections (highlights) - Real GDP growth: 0.6 (2014); 1.0 (2015); 3.8 (2016); 4.0 (2017 prelim.); 4.3 (2018 proj.); 4.0 (2019–2023 proj.). - Consumer price index (annual average): -0.2 (2014); 0.1 (2015); -1.4 (2016); 0.8 (2017); 1.0 (2018); 1.5 (2019); 2.0 (2020–2023). - External current account (including official transfers, percent of GDP): -9.1 (2014); -3.2 (2015); -2.8 (2016); -8.8 (2017); -9.5 (2018); -10.0 (2019–2020); -9.9 (2021–2023). - Gross international reserves (months of prospective imports): 6.2 (2014); 6.0 (2015); 6.2 (2016); 5.6 (2017); 5.4 (2018); 5.2 (2019); 4.6 (2020); 3.9 (2021); 3.2 (2022); 3.0 (2023). - Total nominal government debt (percent of GDP): 115.9 (2014); 126.0 (2015); 129.5 (2016); 126.0 (2017); 124.7 (2018); 126.7 (2019); 126.1 (2020); 124.6 (2021); 122.7 (2022); 120.9 (2023). --- *Source: IMF staff report chapter “1. Recent Economic Developments” (content unit: cr18104).* ### 1. Recent Economic Developments ______________________________________________________________ 19 ### 1. Recent Economic Developments ### A. Recent Developments - 2017 GDP growth is estimated at 4 percent compared to 3.8 percent in 2016 and an average of 0.9 percent during 2012–15. - Recovery drivers: - Double digit-growth in tourist arrivals. - Recovery in credit to the economy. - Stronger consumer and business confidence. - Average inflation: 0.8 percent in 2017 (turned positive reflecting increase in energy prices). - Current account: estimated deficit widened to 8.8 percent of GDP in 2017; mostly financed by FDI. - International reserves: slightly fell to €533 million (5½ months of prospective imports) in 2017. - Credit rating: In May 2017, S&P affirmed “B” and removed the negative outlook, citing favorable growth prospects and significant tourism-related FDI inflows. - Fiscal outturns and public debt: - 2017 budget deficit is estimated at 3 percent of GDP (down from 3.1 percent in 2016). - Total financing needs in 2017 estimated at 4.2 percent of GDP (from 5.6 percent in 2016). - Public debt fell to 126 percent of GDP in 2017, after peaking at 129.5 percent in 2016. - Factors behind 2017 fiscal adjustment: - Increase in tax collections in excess of 10 percent in real terms. - Higher grants including final disbursements under the MCC compact and extraordinary grants in response to weather related disasters. - Under execution of budget for goods and services consistent with partial freeze. - Containment of capital spending. - Appreciation of the escudo vis-à-vis the US dollar contributed to decline in public debt. - Note on non-financial asset transaction: transfer of part of social housing stock from IFH equivalent to 2.5 percent of GDP; without this operation the budget deficit would have been 0.5 percent of GDP. ### B. Authorities’ Views - Authorities expect reforms to raise potential output growth. - Ministry of Finance expected output to expand by more than 5 percent in 2018, as envisaged in the budget. ### C. Context on Past Performance and Governance - Poverty and inequality progress (National Statistics Institute): incidence of poverty fell to 35 percent in 2015 from 57 percent in 2001; extreme poverty fell to 11 percent in 2015 from 30 percent in 2001 using national extreme poverty line of €1.2 per person per day in 2015. Consumption-based Gini fell to 0.42 in 2015 from 0.53 in 2001. - Two PSIs supported policies during 2006–12; sizable fiscal consolidation under first PSI (2006-10); weaker performance against quantitative targets under second PSI. - Implementation of advice on mitigating fiscal risks from SOEs has been weaker. - Data provision: broadly adequate for surveillance. ### 2. Medium-Term Outlook and Risks ### A. Outlook (Staff projections) - 2018 output growth expected to accelerate to 4.3 percent, then stabilize at around 4 percent over the medium term. - Average inflation projected to remain stable at about 1 percent in near term and increase gradually to stabilize at about 2 percent over the medium term. - 2018 current account deficit projected to widen to 9.5 percent of GDP and remain at about 10 percent of GDP over the medium term. - Public debt levels: projected to fall only modestly over the medium term. - International reserves coverage: expected to remain at about 5½ months of prospective imports in 2018 and then gradually decline over the medium term, below the level considered adequate by staff. - Projected decline in net external financing to the central government envisaged in the MTFF contributes to reserve decline. ### B. Risks - Downside risks: weaker-than-expected global growth, tighter global financial conditions, loss of correspondent banking relations (CBRs). - Domestic risks: wavering fiscal consolidation, delays in SOE restructuring, delays in structural reforms to increase productivity. - Upside possibilities: faster tourism growth from improved infrastructure and stronger European recovery; stronger linkages between tourism and domestic economy could accelerate non-tourism sector growth. ### 3. Debt Sustainability and External Stability ### A. Debt Sustainability Analysis - Risk of external debt distress: assessed as high (unchanged from previous DSA). - External debt characteristics: 75 percent of total public debt is external and highly concessional. - Under the baseline scenario, the debt-service-to-revenue ratio would remain below the threshold throughout 2037, but growth and exchange rate vulnerabilities remain elevated. - Text Figure 2 notes: most extreme stress test corresponds to a Combination shock. ### B. External Stability Assessment - External position: moderately weaker than implied by fundamentals and desirable policy settings, but risks appear low (Annex III). - Real effective exchange rate: broadly in line with macroeconomic fundamentals. - Reserve adequacy: reserves remain adequate though projected to decline. - Structural competitiveness issues: non-price competitiveness concerns, need to increase productivity of human and physical capital, improve business environment (access to financing, reduce bureaucratic inefficiencies, improve education). ### 4. Policy Discussions and Priorities ### A. Overall Policy Priorities - Development priorities: promote inclusive economic growth, reduce vulnerabilities, and implement ambitious structural reform agenda. - Key policy discussion points: - Need to significantly reduce public debt. - Importance of policies consistent with protecting the peg and strengthening the financial system. - Role of structural reforms in promoting private sector development and investment while protecting the most vulnerable. ### B. Fiscal Policy: Authorities’ MTFF and Staff Views - Authorities’ MTFF aims at fiscal consolidation to offset projected decline in grants and keep public debt on a downward trend; MTFF relies on optimistic growth assumptions, revenue administration gains, speedy SOE restructuring, and imprecise expenditure rationalization plans. - Staff projections for 2018 (under their assessment): - Deficit projected to widen to 3.2 percent of GDP. - Total financing needs projected to 8.9 percent of GDP. - Public debt projected to decline to 124.7 percent of GDP. - Under more prudent assumptions than MTFF, over the medium term the budget deficit would widen and public debt would remain at about 125 percent of GDP by 2021 (instead of falling to 113 percent as projected in the MTFF). ### C. Sovereign Guarantees and SOE Restructuring - Outstanding stock of sovereign guarantees at end-September 2017 estimated at 7.6 percent of GDP (most guarantees on domestic borrowing). - Government intends to restructure all SOEs with priority to TACV, IFH, and Electra. - Restructuring costs: government may need to assume up to 6 percent of GDP in debt obligations for TACV (amounts being renegotiated; authorities expect to reduce this amount by at least half). - 2018 budget envisages issuance of sovereign guarantees to SOEs equivalent to 5.3 percent of GDP, one third of which would be to TACV, IFH, and Electra. - Government support to SOEs expected to decline significantly by 2020 following successful restructuring of TACV, IFH, and Electra. ### D. Staff’s Recommended Fiscal Strategy - Main fiscal challenge: address high public indebtedness and reduce fiscal risks. - Best strategy (staff): ambitious and sustained fiscal adjustment while protecting the peg and taking advantage of favorable economic conditions. - Target: keep public gross financing needs below 14 percent of GDP and reduce risk of external debt distress to moderate by 2023, which would involve bringing external public debt below LIC DSF threshold applicable to high capacity countries (55 percent of GDP from July 1, 2018). - Proposed measures (combination of revenue and expenditure): - Increase VAT rate to 17 percent. - Cap expenditure on goods and services at 4 percent of GDP (average in 2013-17). - Cap net acquisition of non-financial assets at 3 percent of GDP (average in 2016-17). - Contain growth in public employment. - Limit issuance of debt guarantees to contain fiscal risks. - Expected outcomes from proposed adjustment and reforms: - Open room for faster growth in credit and crowd-in the private sector. - Boost investor confidence. - Accelerate medium-term growth to 5 percent. - Put public debt on a downward path. - Reduce risk of external debt distress to moderate by 2023. - Facilitate external adjustment and keep reserve adequacy at about 5½ months of prospective imports. ### E. Institutional and Structural Reforms - Priority: rapidly restructure loss-making SOEs at least cost to the budget and prevent re-emergence of SOE fiscal burdens. - Recommended institutional measures: - Develop mechanisms to oversee SOE financial performance and borrowing plans. - Integrate SOEs into budget preparation processes. - Create mechanisms to detect deviations from planned performance for timely corrective action. - Implement new organic budget law to strengthen budget execution, broaden coverage to the non-financial public sector, and introduce a debt ceiling. - Revenue administration: recent reforms successful in mobilizing domestic resources; further measures include revisiting existing tax expenditures and resisting pressures to grant additional tax exemptions. _Italic line: Source: IMF staff report chapter “1. Recent Economic Developments” (content unit: cr18104)._ ### 17. The authorities agreed that reducing public debt is a priority and saw merits in the ### 17. The authorities agreed that reducing public debt is a priority and saw merits in the fiscal anchors recommended by the mission ### Fiscal policy, revenues, expenditures, and public debt - Authorities reiterated commitment to fiscal consolidation and putting debt on a downward path; preference for revenue administration and expenditure containment over raising taxes. - Authorities reported revenue administration efforts increased tax revenues to 21.1 percent of GDP in 2017 from 17.5 percent in 2014; plan additional human and IT resources to revenue administration in 2018 and engaged an international consultant to streamline tax incentives. - Authorities intend a partial freeze of 10 percent in the goods and services budget for 2018. - Key fiscal and debt statistics (selected series as presented): - 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 - Revenues22.9 26.9 27.0 28.4 29.8 28.1 27.5 27.2 27.7 27.6 - of which: Grants1.82.52.83.51.91.31.00.90.9 0.9 - Expenditure30.5 31.4 30.1 31.4 33.0 34.0 32.7 31.8 31.7 31.7 - of Which: Capital expenditure6.25.63.45.03.75.54.84.74.7 4.7 - Overall balance-7.6 -4.6 -3.1 -3.0 -3.2 -5.9 -5.2 -4.6 -4.1 -4.1 - Primary balance-5.4 -2.0 -0.5 -0.4 -0.2 -2.9 -2.1 -1.5 -1.0 -1.0 - Total Financing Needs 1/-10.8 -7.6 -6.6 -4.2 -8.9 -8.6 -6.3 -5.3 -4.7 -4.7 - Public debt115.9 126.0 129.5 126.0 124.7 126.7 126.1 124.6 122.7 120.9 - PV of public debt...... 105.5 98.8 97.6 99.3 99.5 98.9 98.1 98.2 - PV of external public debt61.4 65.0 73.3 66.9 67.4 67.3 65.9 64.0 61.7 60.5 - Memorandum items: - Real GDP growth 2/0.61.03.84.04.34.04.04.04.0 4.0 - Current accound balance-9.1 -3.2 -2.8 -8.8 -9.5 -10.0 -10.0 -9.9 -9.9-9.9 - Gross international reserves 3/6.26.06.25.65.45.24.63.93.2 3.0 - Credit to the economy 4/-1.02.73.75.15.24.54.54.54.5 4.5 - Baseline and Active scenario projections (selected series as presented): - Revenues29.7 29.2 28.6 28.3 28.7 28.6 - of which: Grants1.91.31.00.90.9 0.8 - Expenditure31.8 31.1 30.3 29.4 29.3 29.2 - of Which: Capital expenditure3.03.03.03.03.0 3.0 - Overall balance-2.1 -1.9 -1.7 -1.2 -0.6 -0.5 - Primary balance1.01.01.21.62.0 1.9 - Total Financing Needs 1/-7.7 -4.6 -2.8 -1.8 -1.2 -1.2 - Public debt124.1 122.0 117.2 111.8 106.1 100.8 - PV of public debt96.9 95.5 92.3 88.4 84.2 81.0 - PV of external public debt67.7 66.4 63.4 60.2 57.0 54.7 - Memorandum items: - Real GDP growth 2/3.84.05.05.05.0 5.0 - Current accound balance-8.3 -7.5 -6.9 -7.0 -6.6 -6.4 - Gross international reserves 3/5.85.85.65.65.6 5.6 - Credit to the economy 4/5.05.36.06.06.0 6.0 ### SOE reform and fiscal institutions - SOE reform objective: eliminate SOEs’ need for government support. - TACV restructuring: transfer of domestic operations to a new airline with 30 percent government participation successful; renegotiation of TACV’s debts progressing; privatization of international operations expected finalized by April 2018. - IFH social housing transfer to municipalities ongoing; sales of larger houses progressing. - Electra restructuring slower than anticipated but expected to gather momentum. - Authorities expect new organic budget law approval in coming months and agree on necessity to closely monitor SOE performance to reduce fiscal risks. ### Monetary and exchange rate policy - BCV maintained accommodative stance; policy rate cuts cumulate to 425 bp since August 2014; in June 2017 cut by 200 bp to 1.5 percent. - Measures to strengthen monetary policy transmission aimed to shorten current transmission lag of about six months. - Credit to the economy recovering, reaching 5.3 percent annual growth in November 2017. - Excess liquidity accumulated to the equivalent of 10.8 percent of GDP in November 2017. - Migrant deposits: 2017 annual flow equivalent to 2.3 percent of GDP; stock represented 38 percent of total deposits (37 percent of GDP). - Staff recommendations and views: - Tighten monetary policy if fiscal consolidation reverses and pressures on reserves emerge. - Monitor evolution of migrant deposits as conditions normalize in the US and Euro zone. - Complement transmission measures by narrowing overnight interest rate corridor to a maximum 150–200 basis points and establishing a symmetrical interest rate corridor with rates linked to the key policy rate. - Strengthen liquidity management capacity and develop plan to address high excess liquidity in banking system. - Aim to maintain international reserves coverage above five months of prospective imports; LIC/MIC framework estimated optimal reserve level at about four months but higher level desirable given small size, high external debt, significant migrant deposits, and lack of export diversification. - Develop contingency plans for potential surge in capital outflows following adoption of new foreign exchange law; strengthen draft BCV organic law to buttress operational independence and limit budget financing. - Authorities’ views: - Agreed with staff on monetary policy and reserve adequacy; committed to two-decades long peg and preserving peg credibility requiring significant reserves cushion. - Stated readiness to tighten monetary policy to ensure international reserves equivalent to at least a third of broad money. - Noted provisions in new foreign exchange law would allow BCV to act in case of capital outflows. ### Financial sector policies and banking sector vulnerabilities - NPLs remain high: non-performing loans represent about 17.3 percent of total loans; legacy loans from 2006-08 real estate projects contribute about 70 percent of NPL stock. Excluding legacy loans, NPLs represent 6.3 percent of total loans. - BCV extended period to liquidate repossessed assets in 2013-16 from 2 to 5 years in February 2015; these assets must start being liquidated or written off banks’ balance sheets in 2018. - Authorities considering initiatives to promote bank lending, including partial guarantees on loans to SMEs. - Correspondent banking relationships (CBRs) declined: active correspondent banks down to 33 in 2017 from 38 in 2015; value of payment flows declined by 27 percent between 2014 and 2016. - Stress test findings: - Under sectoral credit shocks, most banks would experience significant losses but remain above minimum capital ratio of 10 percent. - Average capital adequacy ratio (CAR) would decline by 1.7 percentage points but no bank would be undercapitalized under sectoral shocks. - Default by the three largest debtors would reduce capital by 12.8 percent (1.4 percent of GDP); CAR would decline by 6.2 percentage points and 2 banks would not meet minimum regulatory capital requirements. - Text Table 2 (impact of legacy loans write-off, data as of end-September 2017): - Non-performing loans to total loans (percent) 17.3 - Capital 16,522 - Risk weighted assets 97,201 - Capital adequacy ratio without write-off (percent) 17.0 - Provision 9,943 - Legacy NPLS 12,799 - Non-performing loans less of legacy NPLS to total loans (percent) 6.3 - Additional provisioning required to write-off 2,856 - Capital after write-off of legacy loans 13,666 - Risk weighted assets without legacy loans 84,402 - Capital adequacy ratio with write-off of legacy loans (percent) 16.2 - Staff recommendations: - Resolve legacy NPLs as a priority and avoid further forbearance of write-off requirements. - Implement recommendations of the 2013 and 2015 asset quality reviews. - Improve banks’ loan portfolio assessment models and implement 2017 BCV study recommendations on loan restructuring, collateral valuation, and asset classification. - Increase bank capital to more comfortable levels relative to risks. - Foster financial intermediation through reforms: strengthen collateral repossession, create a central registry of movable collateral, improve credit information system, and implement financial education for SMEs. - Avoid initiatives that encourage bank lending if they would generate potential fiscal liabilities given high public debt. - BCV and commercial banks should assess loss of CBRs, develop contingency plans, establish contacts with correspondent banks and supervisors, improve AML/CFT framework to FATF standard, and implement FATCA and agreed tax good governance standards with the EU. - Authorities’ views: - Agreed on importance of addressing NPLs and fostering intermediation; non-legacy NPLs trending downwards. - Near-term partial loan guarantees could facilitate SME credit; 2018 budget limits issuance of loan guarantees for the private sector to 0.7 percent of GDP. - Concerned about loss of CBRs; attribute loss to economy’s scale and due diligence costs; consider AML/CFT largely aligned with international standards and report ongoing work to improve tax cooperation. ### Structural reforms and social policies - PEDS 2017–21 aims to exploit Cabo Verde’s geographical position to integrate into world economy and diversify activities and export markets. - Staff views: - Steady implementation of structural reforms critical to boost potential growth and reduce poverty. - High public indebtedness limits public sector role in demand management. - Cabo Verde ranks well on social indicators versus Sub-Saharan Africa but poverty, inequality and unemployment remain high. - Need to improve labor market efficiency and flexibility, quality and relevance of education and training to address youth and female unemployment. - Large increases in minimum wage unrelated to productivity gains (e.g., recently decreed 18 percent increase to private sector workers) risk competitiveness and informality. - Near-term: strengthen targeting of social programs, protect social spending from fiscal consolidation, and establish safety net for natural disasters. - Authorities’ views: - Shift to private sector-led model to improve efficiency and competitiveness; public sector seen as inefficient. - Expect productivity and potential output gains from business environment reforms, privatization of inefficient SOEs, private sector participation in infrastructure, including inter-island transport. - Plans to reform education sector to improve efficiency and alignment with country needs. - Ongoing work on single social registry (Cadastro Social Unico) to better target social expenditure and on strategic mitigation and response plan to national disasters. ### Staff appraisal and macro outlook - Recovery gaining momentum: economy estimated to have expanded by 4 percent in 2017 supported by double-digit growth in tourist arrivals, recovery in credit, and stronger confidence. - 2018 projection: output growth projected to accelerate to 4.3 percent. - Current account deficit projected to widen to 9.5 percent of GDP and remain mostly financed by FDI. - International reserves coverage projected to remain at about 5½ months of prospective imports in 2018; considered adequate given size, high external debt, significant migrant deposits, and lack of export diversification. *Sources: Cabo Verdean authorities and IMF staff estimates and projections.* ### 38. The favorable external conditions present an opportunity to accelerate progress ### 38. The favorable external conditions present an opportunity to accelerate progress ### Macro outlook and risks - The medium-term outlook is broadly stable conditional on a decisive implementation of the government’s reform agenda. - The projected decline in international reserves coverage over the medium term calls for a more decisive fiscal consolidation. - External and domestic risks have become more balanced as the recovery in Europe gathers pace but vulnerabilities remain. - Downside risks include: weaker-than-expected global growth, tighter global financial conditions, and the loss of correspondent banking relations (CBRs). ### Fiscal policy and public debt - Fiscal policy should be geared towards reducing the risk of external debt distress to moderate. - The decline in the stock of public debt in 2017 reflects the authorities’ determination to mobilize domestic revenues and contain expenditures. - The risk of external debt distress currently remains high. - Significantly reducing the high public debt is necessary to: - support higher growth in the medium term, and - safeguard macroeconomic and financial stability. - Decisive fiscal consolidation through a combination of revenue and expenditure measures can lower the risk of external debt distress to moderate by 2023. - Successful adjustment will require accelerating the restructuring of SOEs to eliminate their need for government support, in particular for the three largest loss-making SOEs (TACV, IFH, and Electra). - Fiscal consolidation would also support the external position, which is currently moderately weaker than implied by fundamentals and desirable policy settings. ### Monetary policy, reserves, and liquidity - The BCV’s monetary policy stance has been appropriate in the absence of pressures on reserves and consistent with the objective of protecting the peg. - The BCV needs to remain vigilant as monetary policy conditions normalize in the US and the Euro zone, which may affect the evolution of migrant deposits. - Measures adopted in June, 2017 to strengthen the monetary transmission mechanism are welcome. - The BCV should: - step up efforts to strengthen its liquidity management capacity, and - develop a plan to address the high level of excess liquidity in the banking system. ### Financial sector stability and NPLs - Financial stability indicators have improved but the high level of NPLs needs to be addressed. - The BCV’s efforts to strengthen banking sector regulation and supervision are important to safeguard financial stability. - Resolving the high level of legacy NPLs should be a priority. - Further forbearance of requirements to write off irrecoverable loans should be avoided. ### Financial intermediation and private sector finance - Fostering financial intermediation is important to strengthen the private sector’s role as the engine of growth. - Recommended reforms: - strengthen collateral repossession, - improve the credit information system, and - develop and implement a financial education program for SMEs. - Given the high level of public debt, initiatives to encourage bank lending that generate contingent fiscal liabilities should be avoided. ### Correspondent banking relations (CBRs), remittances, and AML/CFT - The loss of CBRs represents a vulnerability given Cabo Verde’s reliance on migrant remittances and deposits. - The BCV should work closely with commercial banks to: - assess the consequences of the loss of CBRs, and - develop contingency plans in case additional CBRs are lost. - Preventing and possibly reversing the loss of CBRs over time would be facilitated by: - strengthening the AML/CFT framework in line with international standards, - addressing any deficiencies identified in the ongoing AML/CFT assessment, and - effectively cooperating with other jurisdictions on tax issues. ### Legal and institutional reforms - Plans to adopt a new foreign exchange law and a new BCV organic law are welcome. - The new foreign exchange law would consolidate existing foreign exchange legislation and liberalize the already de facto open capital and financial accounts to support further integration of Cabo Verde in the global economy. - The draft BCV organic law under consideration should be strengthened to: - reinforce the BCV operational independence, and - limit budget financing. ### Structural reforms and social protection - Steady implementation of structural reforms is critical to boost potential growth and reduce poverty. - Priority areas: - improve the efficiency and flexibility of the labor market, - improve the quality and relevance of education — both are important to increase productivity and address the high levels of youth and female unemployment. - Staff welcomes the PEDS focus on reforms to promote inclusive growth but notes these reforms are likely to take time to bear fruit. - In the near term, adequately protecting the poor requires: - strengthening and improving the targeting of social programs, and - protecting social spending from the fiscal consolidation efforts. *International Monetary Fund — Cabo Verde staff report excerpt.* ### 46. It is proposed that the next Article IV consultation with Cabo Verde be held on the ### 46. It is proposed that the next Article IV consultation with Cabo Verde be held on the standard 12-month cycle. ### Risk Assessment Matrix — systemic risks, likelihoods, impacts, and policy responses - Weaker-than-expected global growth - Relative Likelihood: High - Impact if Realized: Medium/High - Key channels: depressed exports, remittances, and FDI from prolonged stagnation in Europe; significant impact on economic growth, external sustainability, and foreign reserves. - Policy Response: Accelerate structural reforms to increase productivity and improve the business environment. - Tighter or more volatile global financial conditions - Relative Likelihood: High - Impact if Realized: Medium - Key channels: abrupt change in global risk appetite → sudden increases in interest rates, higher debt service and refinancing risks, capital account pressures; reduced migrant deposits; weaker FDI into tourism real estate. - Policy Response: Tighten monetary policy; accelerate reforms to increase productivity and improve the business environment. - Reduced financial services by correspondent banks (CBRs) - Relative Likelihood: Medium - Impact if Realized: High - Key channels: curtailment of cross border financial services; BCV and commercial banks have lost some CBRs; further loss could reduce capital flows and threaten banking system stability given dependence on migrant remittances and deposits. - Policy Response: Develop contingency plans to limit the loss of CBRs; further strengthen the AML/CFT framework. - Wavering fiscal consolidation and SOEs restructuring efforts - Relative Likelihood: Medium - Impact if Realized: High - Key channels: political pressures reduce fiscal consolidation ambition and delay SOE restructuring → undermines perception of macro stability, reduces capital inflows, weakens confidence in the peg, crowds out private investment. - Policy Response: Reduce current spending and postpone or cancel non-priority infrastructure projects; reinvigorate the SOEs reform plans. - Delays in implementing measures to increase productivity - Relative Likelihood: Medium - Impact if Realized: Medium - Key channels: delayed structural reforms hinder competitiveness, potential GDP growth, and the stability of the exchange peg. - Policy Response: Accelerate structural reforms. ### Recent economic and monetary developments (figures and descriptive notes) - Money and credit dynamics - Money growth has been driven mainly by NFA in recent years (chart annotation). - Excess reserves in the banking system; credit is slowly recovering (chart annotation). - NPLs remain high (chart annotation). - Despite the sluggish response of lending rates to monetary policy easing (chart annotation). - Figures use sources: Cabo Verdean authorities and IMF staff. ### Performance compared to Small Middle-Income Peers (selected comparisons) - Peers defined: Belize, Lesotho, Mauritius, Seychelles, Swaziland, and Vanuatu. - Fiscal performance: "Cabo Verde's fiscal performance has improved in recent years..." (chart annotation). - International reserves coverage: months of next year’s imports remained strong relative to peers (chart annotation). - Public debt: "public debt is now more than twice the average of Small MICs" (chart annotation). - External current account: "has narrowed..." (chart annotation). - Real GDP growth: "Cabo Verde has catched up to Small MICs average in terms of growth..." (chart annotation). - Headline inflation: "its inflation has been lower." (chart annotation). ### Baseline and Active scenarios (Figure 4 summary) - Structural reforms combined with sustained fiscal consolidation would: - Boost productivity. - Facilitate external adjustment. - Stabilize reserve adequacy. - Help keep public debt on a declining path. - Charts plot GDP Growth (Percent), External Sector Indicators (Percent of GDP), Budget Deficit (Percent of GDP), and Government Debt (Percent of GDP) for 2014–22 under Baseline, Active, and MTFF scenarios. ### Selected Economic Indicators — key values and projections (Table 2 highlights) - Real GDP: 0.6 (2014); 1.0 (2015); 3.8 (2016); 4.0 (2017 prelim.); 4.3 (2018 proj.); 4.0 (2019 proj.); 4.0 (2020 proj.); 4.0 (2021 proj.); 4.0 (2022 proj.); 4.0 (2023 proj.) - Consumer price index (annual average): -0.2 (2014); 0.1 (2015); -1.4 (2016); 0.8 (2017); 1.0 (2018); 1.5 (2019); 2.0 (2020); 2.0 (2021); 2.0 (2022); 2.0 (2023) - Exports of goods and services: 2.7 (2014); -11.6 (2015); 11.8 (2016); 11.3 (2017); 10.9 (2018); 7.0 (2019); 7.1 (2020); 7.1 (2021); 7.1 (2022); 7.1 (2023) - Of which: tourism: -12.5 (2014); 2.0 (2015); 7.0 (2016); 10.0 (2017); 13.7 (2018); 6.5 (2019); 6.5 (2020); 6.5 (2021); 6.5 (2022); 6.5 (2023) - Imports of goods and services: 6.3 (2014); -12.3 (2015); 11.8 (2016); 15.2 (2017); 8.1 (2018); 7.4 (2019); 7.0 (2020); 7.0 (2021); 7.0 (2022); 7.0 (2023) - Broad money (M2) growth: 7.4 (2014); 6.3 (2015); 8.4 (2016); 3.0 (2017); 5.8 (2018); 5.0 (2019); 3.3 (2020); 2.4 (2021); 2.7 (2022); 2.5 (2023) - External current account (including official transfers, percent of GDP): -9.1 (2014); -3.2 (2015); -2.8 (2016); -8.8 (2017); -9.5 (2018); -10.0 (2019); -10.0 (2020); -9.9 (2021); -9.9 (2022); -9.9 (2023) - Gross international reserves (months of prospective imports of goods and services): 6.2 (2014); 6.0 (2015); 6.2 (2016); 5.6 (2017); 5.4 (2018); 5.2 (2019); 4.6 (2020); 3.9 (2021); 3.2 (2022); 3.0 (2023) - Total nominal government debt (percent of GDP): 115.9 (2014); 126.0 (2015); 129.5 (2016); 126.0 (2017); 124.7 (2018); 126.7 (2019); 126.1 (2020); 124.6 (2021); 122.7 (2022); 120.9 (2023) - Present value of external debt (percent of GDP): 65.0 (2014—memo in Table); 73.3 (2015); 66.9 (2016); 67.4 (2017); 67.3 (2018); 65.9 (2019); 64.0 (2020); 61.7 (2021); 60.5 (2022) — (table shows series and risk threshold: 50%) - Nominal GDP (billions of Cabo Verde escudos): 154.4 (2014); 158.7 (2015); 163.4 (2016); 170.1 (2017); 179.8 (2018); 189.9 (2019); 201.3 (2020); 213.6 (2021); 226.6 (2022); 240.4 (2023) - Gross international reserves (€ millions, end of period): 419.7 (2014); 453.3 (2015); 541.0 (2016); 532.8 (2017); 553.5 (2018); 566.8 (2019); 534.8 (2020); 483.8 (2021); 429.0 (2022); 389.0 (2023) ### Balance of Payments — key aggregates (Table 3 highlights, Millions of Euros) - Current account: -127 (2014); -46 (2015); -41 (2016); -136 (2017); -155 (2018); -173 (2019); -183 (2020); -193 (2021); -203 (2022); -215 (2023) - Trade balance: -455 (2014); -427 (2015); -483 (2016); -579 (2017); -636 (2018); -694 (2019); -751 (2020); -794 (2021); -854 (2022); -903 (2023) - Services (net): 198 (2014); 205 (2015); 236 (2016); 268 (2017); 321 (2018); 352 (2019); 386 (2020); 405 (2021); 438 (2022); 459 (2023) - Services receipts: 482 (2014); 460 (2015); 530 (2016); 588 (2017); 662 (2018); 714 (2019); 771 (2020); 813 (2021); 872 (2022); 921 (2023) - Tourism receipts (of which tourism): 291 (2014); 297 (2015); 318 (2016); 350 (2017); 398 (2018); 424 (2019); 451 (2020); 481 (2021); 512 (2022); 545 (2023) - Secondary income (net): 200 (2014); 229 (2015); 261 (2016); 241 (2017); 223 (2018); 240 (2019); 260 (2020); 281 (2021); 302 (2022); 324 (2023) - Remittances: 140 (2014); 169 (2015); 162 (2016); 154 (2017); 149 (2018); 164 (2019); 182 (2020); 201 (2021); 221 (2022); 240 (2023) - Financial account (including reserves and exceptional financing): -98 (2014); -74 (2015); -31 (2016); -62 (2017); -142 (2018); -165 (2019); -179 (2020); -188 (2021); -185 (2022); -197 (2023) - Gross international reserves (end-year, Millions of Euros): 420 (2014); 453 (2015); 541 (2016); 533 (2017); 553 (2018); 567 (2019); 535 (2020); 484 (2021); 429 (2022); 389 (2023) - Months of next year's imports of goods and services (gross international reserves): 6.2 (2014); 6.0 (2015); 6.2 (2016); 5.6 (2017); 5.4 (2018); 5.2 (2019); 4.6 (2020); 3.9 (2021); 3.2 (2022); 3.0 (2023) ### Central Government fiscal operations — key lines (Table 4a/4b highlights) - Revenue (Millions of CVE): 35,327 (2014); 42,678 (2015); 44,107 (2016); 50,222 (2017 Rev.); 48,233 (2018 Budget Est.); projections continue through 2023 up to 66,480 (2023 MTFF Proj.) - Revenue (percent of GDP): 22.9 (2014); 26.9 (2015); 27.0 (2016); 29.5 (2017 Rev.); 28.4 (2018 Budget Est.); projections through 2023 show around 27.7–29.0 (various entries) - Expenditure (Millions of CVE): 47,082 (2014); 49,907 (2015); 49,139 (2016); 55,582 (2017 Rev.); 53,408 (2018 Budget Est.); projections to 76,291 (2023 MTFF Proj.) - Expenditure (percent of GDP): 30.5 (2014); 31.4 (2015); 30.1 (2016); 32.7 (2017 Rev.); 31.4 (2018 Budget Est.); projections around 31.7–33.2 in later years. - Overall balance (incl. grants, Millions of CVE): -11,756 (2014); -7,229 (2015); -5,032 (2016); -5,360 (2017 Rev.); -5,174 (2018 Budget Est.); projections through 2023 show deficits and variances (e.g., -9,860 (2021 Rev. MTFF Proj.), -9,240 (2022 Proj.), -9,810 (2023 Proj.)) - Net other liabilities and financing items reported, including onlending and capitalization, with detailed year-by-year entries in Table 4a. ### Monetary survey — stocks and flows (Table 5 highlights, Millions of CVE) - Net foreign assets: 42,698 (2014); 48,463 (2015); 58,018 (2016); 55,492 (2017); 58,390 (2018); 59,313 (2019); 56,577 (2020); 51,751 (2021); 47,195 (2022); 42,783 (2023) - Gross international reserves: 46,277 (2014); 49,979 (2015); 59,658 (2016); 58,822 (2017); 61,032 (2018); 62,493 (2019); 58,971 (2020); 53,351 (2021); 47,302 (2022); 42,891 (2023) - Net domestic assets: 104,970 (2014); 108,466 (2015); 112,024 (2016); 119,652 (2017); 126,878 (2018); 135,240 (2019); 144,399 (2020); 154,006 (2021); 164,144 (2022); 173,911 (2023) - Broad money (M2): 147,668 (2014); 156,929 (2015); 170,043 (2016); 175,144 (2017); 185,268 (2018); 194,553 (2019); 200,976 (2020); 205,757 (2021); 211,339 (2022); 216,694 (2023) - Emigrant deposits: 52,779 (2014); 56,943 (2015); 60,711 (2016); 63,563 (2017); 68,343 (2018); 71,831 (2019); 74,203 (2020); 75,968 (2021); 78,029 (2022); 80,006 (2023) - Emigrant deposits/total deposits (percent): 38.0 (2014); 38.5 (2015); 37.7 (2016); 38.4 (2017); 38.8 (2018); 38.8 (2019); 38.8 (2020); 38.8 (2021); 38.8 (2022); 38.8 (2023) ### Financial soundness indicators — banking sector (Table 6 highlights) - Capital adequacy (Regulatory capital to risk-weighted assets): 12.8 (2010); 15.2 (2011); 14.2 (2012); 15.1 (2013); 15.6 (2014); 16.2 (2015); 15.5 (2016); 17.6 (Mar-17); 17.1 (Jun-17); 17.0 (Sep-17); 16.9 (Nov-17) - Nonperforming loans to total loans: 8.4 (2010); 11.8 (2011); 14.0 (2012); 16.4 (2013); 18.7 (2014); 16.5 (2015); 15.5 (2016); 17.1 (Mar-17); 17.4 (Jun-17); 17.3 (Sep-17); 16.6 (Nov-17) - Provisions to nonperforming loans: 73.1 (2010); 57.0 (2011); 53.7 (2012); 51.6 (2013); 48.8 (2014); 54.4 (2015); 58.3 (2016); 54.2 (Mar-17); 51.8 (Jun-17); 51.7 (Sep-17); 54.5 (Nov-17) - Return on assets: 0.7 (2010); 0.4 (2011); 0.2 (2012); 0.3 (2013); 0.2 (2014); 0.4 (2015); 0.3 (2016); 0.1 (Mar-17); 0.3 (Jun-17); 0.5 (Sep-17); 0.6 (Nov-17) - Liquid assets to total assets: 8.1 (2010); 7.1 (2011); 15.0 (2012); 22.1 (2013); 30.3 (2014); 30.3 (2015); 32.6 (2016); 32.2 (Mar-17); 30.2 (Jun-17); 30.8 (Sep-17); 30.8 (Nov-17) - Emigrant deposits over total deposits (percent): 34.9 (2010); 37.1 (2011); 37.1 (2012); 33.4 (2013); 32.9 (2014); 33.3 (2015); 32.1 (2016); 32.1 (Mar-17); 32.7 (Jun-17); 32.6 (Sep-17); 31.9 (Nov-17) *Source: Cabo Verdean authorities and IMF staff.* ### Annex I. Implementation of Past IMF Policy Advice ### Annex I. Implementation of Past IMF Policy Advice ### Policy Support Instrument, 2006–10 and 2010–12 - Objective of the first PSI (2006–10): reduce vulnerabilities, including prospect of a longer-term decline in concessional financing from graduation to middle income status in 2008. - Outcomes under the first PSI: - All eight program reviews completed through 2010. - Robust growth performance. - Structural reforms progressed in the tax and PFM areas. - Authorities completed an FSAP in 2009. - Strong ownership of policies; PSI supported the authorities’ poverty reduction strategy. - Second PSI (2010–12) environment and focus: - Implemented amid weak global demand (especially from the euro zone) and shocks to fuel and food prices. - Staff supported reducing infrastructure bottlenecks but cautioned on rising macroeconomic vulnerabilities: low reserves, high fiscal and current account deficits, rapid growth in external debt. - PSI concentrated on reforming public enterprises, broadening the tax base, and enacting a new banking law covering onshore and offshore banks. - Overall performance: mixed — weak performance against quantitative targets but progress on structural reforms. ### 2016 Article IV Consultation - Main recommendations: - Initiate fiscal consolidation with emphasis on addressing financial difficulties in the SOE sector and improving investment efficiency to strengthen macroeconomic and debt sustainability. - Maintain accommodative monetary policies and continue heightened supervision of the financial sector. - Post-consultation assessment: - Monetary and fiscal policies have been well coordinated and broadly in line with Fund recommendations. - Overall fiscal deficit has remained on a declining trend mostly because of the under-execution of investment projects. - Reforming the SOE sector and reducing high debt levels remains a challenge. - Central bank’s monetary policy stance has remained appropriate, helping bolster international reserves and keep inflation stable. - Financial stability preserved but legacy non-performing loans remain a challenge. ### Annex II. Summary of Capacity Development Strategy #### Main Macroeconomic Challenges - Overarching priorities: accelerate economic growth and reduce vulnerabilities. - Central policy priorities: - Rein in high stock of public debt. - Eliminate vulnerabilities stemming from struggling SOEs. - Recent fiscal developments: - Authorities started fiscal consolidation efforts. - Cut more than half the fiscal deficit in recent years, mainly through delays in execution of externally financed projects. - Risks and recommended actions: - High risk of external debt distress — further policy actions needed to curb public debt over the long term. - Authorities recognize need for additional measures: push ahead with SOE reforms, revenue mobilization, and policies to support economic growth. - Staff encouraged continuing structural reform program with a more gradual and sequenced approach, especially in fiscal area given implementation capacity constraints. #### CD assessment - CD activities reflect authorities’ preferences and reform priorities from Article IV consultations. - Level of technical assistance aligned with authorities’ appetite for reform. - Areas for improvement in CD: - Better prioritization and sequencing. - Adequately consider absorption capacity constraints. - Increased emphasis on hands-on training for implementation rather than diagnostic missions. #### CD priorities (going forward) - Revenue Administration and Tax policy Reforms: increase domestic revenue mobilization and open fiscal space. - PFM reform: reduce costs and risks from SOEs; improve budget credibility; advance program-based budgeting; strengthen debt management. - Strengthening Central Bank Operations: improve monetary policy transmission, liquidity management, and reserves management. - Improve statistics: national accounts and price statistics. #### Authorities’ Views - Ministry of Finance requested TA on preparing the MTFF and developing a debt strategy. - National Statistics Institute supported CD priorities and emphasized support for rebasing national accounts and improving quarterly activity indicators. - Authorities requested TA with more emphasis on “how, not only what” and fewer diagnostic missions. #### Priorities — Objectives (selected) - Revenue Administration and Tax Policy: - Improve taxpayer registration, management of tax arrears, customs control, and staff performance. - Improve tax compliance levels; review tax code to identify revenue opportunities and eliminate inconsistencies. - PFM: - Reduce fiscal costs and risks from SOEs. - Improve budget credibility via strengthened budget preparation and program-based budgeting. - Strengthen debt management. - National Accounts and Price Statistics: - Improve quality of quarterly GDP estimates; develop quarterly GDP by expenditure; rebase GDP and CPI; develop a PPI. - External Sector Statistics: - Improve coverage and quality of source data, particularly non-bank sector, direct investment and portfolio investment stocks. - Government Financial Statistics: - Improve coverage and quality; address delays in donor reporting; enhance staff capacity through GFS training (in Portuguese). - Central Bank Operations: - Improve monetary policy transmission mechanism; develop payment system oversight; improve foreign reserve management. - Other (Training): - Strengthen capacity at Ministry of Finance’s Planning Department through training in financial programming and macroeconomic forecasting. ### Annex III. External Stability Assessment #### A. External Sector Developments - External position: moderately weaker than implied by fundamentals and desirable policy settings, but risks appear low. - REER: broadly in line with macroeconomic fundamentals. - Reserves: remain adequate; international reserve coverage is adequate at over 5.6 months of prospective imports. - Updated LIC/MIC framework estimate of optimal reserve level: about 4 months of prospective imports. - A higher level preferable given small size and lack of export diversification. - Balance of payments characteristics: - Wide current account deficit: about 10 percent of GDP in 2003–16, financed primarily by FDI and government borrowing. - Imports linked to increased investment were financed by FDI until 2008; since then FDI and grants declined and current account deficit increasingly financed by government borrowing, leading to rise in external public debt. - Net international investment position at end 2016: negative $2.37 billion (146 percent of GDP). - Recent current account developments: - 2016 current account: narrowed to 2.8 percent of GDP (after contracting to 3.2 percent of GDP in 2015), driven by strong tourism receipts and remittances. - 2017 estimate: current account widened to 8.8 percent of GDP reflecting higher demand for imports and oil prices. - Medium-term staff forecast: current account to return close to historical level of 10 percent of GDP owing to strong FDI, recovering growth, and high import levels. - Notable event: Fogo island volcano eruption in 2014 led to increase in remittances in following years, affecting current account. #### B. Model-Based Assessment - REER stability: relatively stable over past decade; in 2017 REER remained in line with the average over the past five years. - EBA-lite assessment (2017): - Current account—actual (2017): -8.8% - Current account—norm: -7.0% - Current account—gap: -1.8% (=(1)-(2)) - Current account—fitted: -8.0% - Policy gap: -1.0% (=(4)-(2)) - Residual: -0.8% (=(1)-(4)) - Elasticity of CA to REER: -0.4 - REER misalignment for 2017: 4.4% (percentage, "+" = overvaluation) - Interpretation: - External position moderately weaker than level consistent with fundamentals. - Current account gap of -1.8 percent of GDP suggests REER overvalued by about 4.4 percent. - EBA-lite REER model suggests a slight overvaluation of about 2.4 percent. - Estimates subject to uncertainty; residual of -0.8 percent of GDP suggests structural weaknesses or factors not captured by the model (e.g., tourism receipts). #### C. Broader Competitiveness Indicators - Competitiveness overview: - Cabo Verde’s competitiveness improved but lags middle-income country average. - WEF ranking (2017–18): 110th out of 137 countries. - Areas with considerable room for improvement: labor market efficiency, financial market development, business sophistication and innovation. - Doing Business findings: - Strengths: protecting minority investors, resolving insolvency, access to electricity. - Most problematic factors for doing business (2017): access to financing, government bureaucracy, tax rates, workforce education, infrastructure supply. - Weaknesses: enforcing contracts, registering property, dealing with construction permits, burden of paying taxes. - Tourism sector: - Tourism-based economy with sustained growth: between 2000 and 2014 annual average growth rate was 11 percent in number of tourists entering the country. - Market dominated by Europeans; negatively affected by crisis in Europe but seeing rebound, particularly compared to other tourism-dependent small states. - Cabo Verde is a top performer in SSA on travel and tourism competitiveness indicators, but could improve on cultural and business travel, international openness, and ground and transport infrastructure. #### D. Conclusion - External position moderately weaker than implied by fundamentals; broader structural competitiveness issues remain. - Identified policy gap largely explained by fiscal policy and could be addressed by planned fiscal adjustment. - Medium- and long-term external competitiveness depends on increasing productivity of human and physical capital. - Government actions noted: large investment program in infrastructure, initiated labor market reforms, commitment to reform weak SOEs. *Source: INTERNATIONAL MONETARY FUND — Annex I. Implementation of Past IMF Policy Advice.* ### Annex IV. State-Owned Enterprises ### Annex IV. State-Owned Enterprises ### Overview - The government’s fiscal consolidation strategy critically depends on successfully restructuring state-owned enterprises (SOEs). - Support to SOEs is one of the main reasons underlying the rapid accumulation of public and publicly-guaranteed debt in recent years. - Reform of the three largest loss-making enterprises is a government priority. ### Size and fiscal exposure of the SOE sector - 23 active SOEs participate in sectors including transport (air and maritime), real estate, energy and water, pharmaceutical, and infrastructure management (ports and airports). - The 16 largest SOEs had total liabilities equivalent to 46 percent of GDP, of which 6.6 percent of GDP is guaranteed by the central government. - Domestic liabilities are about 12 percent of GDP and include: - tax and social security contribution arrears: 1.6 percent of GDP - loans to the banking sector: 4.2 percent of GDP - domestic capital market: 6.2 percent of GDP ### Recent government support and aggregate performance - Fiscal support to the three largest loss-making SOEs (the airline TACV, the housing company IFH, and the electricity and water company Electra): - In 2014-16: about 3½ percent of GDP annually (on-lending, recapitalization and other budget subsidies and transfers) - In 2017: declined to 2.1 percent of GDP - Aggregate SOE magnitudes and performance: - SOEs had total liabilities in excess of 36 percent of GDP at end-2016 and had received sovereign guarantees equivalent to 6.3 percent of GDP. - In 2016, the three largest loss-making SOEs’ losses reached 1.6 percent of GDP. - Government risk assessment: high risk of central government takeover of liabilities for TACV and IFH; moderate risk for Electra. ### Key SOE financials (selected entries as of December 2016) - Table 1 — State Participation and Net Income in Key SOEs (figures in million Escudo) - ASA — Airport — State Shareholding: 100% — Share Capital: 5,201 — Net Income: 469.4 - ELECTRA — Energy/water — State Shareholding: 78% — Share Capital: 1,585 — Net Income: ‐171.7 - ENAPOR — Ports — State Shareholding: 100% — Share Capital: 1,200 — Net Income: 187.8 - TACV — Transport/Airlines — State Shareholding: 100% — Share Capital: 1,000 — Net Income: ‐2,174.1 - IFH — Housing — State Shareholding: 100% — Share Capital: 750 — Net Income: ‐227.5 - EMPROFAC — Pharmaceutical — State Shareholding: 100% — Share Capital: 200 — Net Income: 171.9 - (Source: 2016 Contingent Liabilities Report, Ministry of Finance) - SOE liabilities at Dec. 31, 2016 (Gov Ownership > 50%, in million CVE) - IFH — State Ownership: 100% — Long-Term Liability: 19,581 — Short-Term Liability: 1,475 — Total Liability: 21,056 — % of Total SOE: 27.9% — State Guarantee: 2,334 — % State Guarantee: 11% - ELECTRA — State Ownership: 78% — Long-Term Liability: 12,796 — Short-Term Liability: 5,188 — Total Liability: 17,984 — % of Total SOE: 23.8% — State Guarantee: 5,003 — % State Guarantee: 28% - TACV — State Ownership: 100% — Long-Term Liability: 4,028 — Short-Term Liability: 8,181 — Total Liability: 12,208 — % of Total SOE: 16.2% — State Guarantee: 2,628 — % State Guarantee: 22% - Total SOE (Gov Ownership > 50%): Long-Term Liability: 52,254 — Short-Term Liability: 23,298 — Total Liability: 75,553 — State Guarantee: 10,335 — % State Guarantee: 14% - Total SOE (Gov Ownership < 50%): Long-Term Liability: 7,033 — Short-Term Liability: 8,586 — Total Liability: 15,697 ### Restructuring progress: the three largest loss-making SOEs - Transportes Aéreos de Cabo Verde (TACV) - August 2017: all domestic routes transferred to Binter Cabo Verde; government received a 30 percent participation in Binter Cabo Verde. - October 2017: one-year management contract signed with Icelandair to operate international routes and prepare TACV for privatization in 2018 after a valuation. - A loan of €13.5 million contracted with Bank BNI Europa to finance workforce retrenchment costs. - TACV current liabilities are €100 million (6 percent of GDP). The government expects to reduce them by at least 50 percent through renegotiation with creditors. - The fiscal cost for 2017-18 is estimated at about 2.2 percent of GDP. - Imobiliária, Fundiária e Habitat, S.A (IFH) - 2017: Casa Para Todos (“House for All”) housing program restructured. - Class A (low income units) houses started to be transferred to municipal governments and the central government. - Class B and C developments started to be commercialized. - The fiscal cost for 2017-18 is estimated at 0.6 percent of GDP. - Electra - Board of Directors mandated to improve efficiency and prepare the company for privatization. - A revenue protection program implemented to reduce high commercial losses. - Distribution and transmission losses: 27 percent in 2016, declined from 29 percent in 2015. - Restructuring underway to unbundle water and energy operations. - Government plans to move forward with the privatization of ELECTRA in 2018/2019. - The fiscal cost for 2017-18 is estimated at 0.3 percent of GDP. ### Other reforms and institutional measures - Measures in progress to strengthen SOE operations include: - creation of an SOE oversight unit at the Ministry of Finance in July 2016; - follow up and monitoring platform of the SOEs; - revision of the legal framework and management contracts (giving public managers goals and metrics for performance evaluation) of major SOEs; - review of the PPP law; - development of instruments to monitor concession contracts; - technical training by the World Bank on SOEs reforms. ### Risk assessment (selected SOEs) - AS A — Risk: Low - ENAPOR — Risk: Low - ELECTRA — Risk: Moderate - TACV — Risk: High - IFH — Risk: High - EMPROFAC — Risk: Low *Source: cr18104 - Annex IV. State-Owned Enterprises.* ### 1. Systematic Country Diagnostic October 2017 Spring 2018 ### 1. Systematic Country Diagnostic October 2017 Spring 2018 ### IMF work program (next 12 months) - Investment Loan and Fiscal Risk Management Operation: February 2018 — Spring/Summer 2018 - TA on Debt Management: February 2018 — June 2018 - Staff Visit: May 2018 - Article IV Consultation: January 2019 - Fund request to Bank: - Updates on SOE reforms and financial situation - Updates on real sector developments FY 2018/19 - Bank request to Fund: - Macroeconomic framework updates FY 2018/19 ### Statistical issues — Assessment of data adequacy for surveillance (As of March 8, 2018) - General: - "Data provision has some shortcomings but is broadly adequate for surveillance." - Improvements needed in national accounts, government finance, and external sector statistics. - Statistical system constrained by shortage of financial and human resources. - A comprehensive master plan developed under the National Statistical Institute (INE). - National Accounts: - Significant improvements with IMF STA TA; timely release of quarterly and yearly GDP data. - Most recent annual GDP data released are for 2016 (released in March 2017). - INE implemented chained linked time series and changed base year from 1980 to 2007. - Annual national accounts based on new methodology presented first in July 2013 (for 2011 and backward projections 2002–10). - Quarterly national accounts by production approach published first in April 2015. - Quarterly GDP estimates for 2014 were revised significantly during the annual revision. - Planned GDP rebasing with base year of 2015 and development of quarterly expenditure-side GDP components. - Full implementation of the 2008 SNA and quarterly national accounts requires substantial improvement in source data collection. - INE building series including business, household, labor force, governance, security surveys, and satellite accounts. - Recommendation: greater prioritization of data collection, improved use of administrative data (in particular tax data), and TA on estimating/extrapolating activity from random sampling surveys. - Price Statistics: - Revamped CPI with new methodology launched in February 2008. - Previous official CPI weights dated to 1989. - INE receiving support from the National Statistics Institute of Portugal and AFRITAC West 2 to rebase, reweight and disseminate a revised CPI in 2020. - CPI published monthly and timely. - INE developing a Producer Price Index to be released in the near future. - Government Finance Statistics: - Fiscal data have improved; GFS compilation system being upgraded with TA. - Recent TA helped compile GFS in line with GFSM 2001. - Authorities have started reporting GFS for publication in the IFS and GFS Yearbook; last year submitted was 2012. - Quality concerns: statistical discrepancies; flows and stocks not always consistent. - Tax arrears and overdue tax credits and refunds need better measurement and integration into the budget. - Institutional coverage of fiscal data needs broadening. - Significant delay in donor reporting of project financing affects fiscal data accuracy. - Weaknesses persist regarding public and publicly guaranteed debt of SOEs despite recent external debt revision. - Monetary and Financial Statistics: - Adequate; quality of the monetary survey has improved. - SRFs-based monetary statistics published in IFS since June 2007 monthly. - Data aligned with the Monetary and Financial Statistics Manual and MFS Compilation Guide. - Integrated monetary database meeting STA, AFR, and BCV needs is in place. - Cabo Verde does not report financial soundness indicators for dissemination on the IMF’s website. - External statistics: - BCV reports quarterly balance of payments and IIP data to STA, largely following BPM6. - BCV reports inward Coordinated Direct Investment Survey starting with 2012 data. - Expanded use of surveys and International Transactions Reporting System improved coverage. - Further improvements needed in data sources and compilation techniques in context of total capital transactions liberalization. - Data coverage needs strengthening for foreign trade in goods, direct investment, portfolio investment liabilities, and nonbank sectors’ external transactions via accounts held abroad. ### Data standards and quality - Cabo Verde has participated in the General Data Dissemination System (GDDS) since February 2004. - "No data ROSC has been done in Cabo Verde." ### Cabo Verde: Common Indicators Required for Surveillance (As of March 8, 2018) — selected timing and frequency entries - Exchange rates: Date of Latest Observation 12/31/17; Date Received 1/26/18; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D - International reserve assets and reserve liabilities of the monetary authorities: 12/31/17; 1/26/18; D; W; M - Reserve/base money: 11/30/17; 1/26/18; D; W; M - Broad money: 11/30/17; 1/26/18; M; W; M - Central bank balance sheet: 11/30/17; 1/26/18; D; W; M - Consolidated balance sheet of the banking system: 11/30/17; 1/26/18; M; M; M - Interest rates: 12/31/17; 1/26/18; M; M; M - Consumer price index: 1/31/18; 2/20/18; M; M; M - Revenue, expenditure, balance, and composition of financing—central government: 11/30/17; 1/26/18; M; Q; A - Stocks of central government and central government-guaranteed debt: 12/31/17; 1/26/18; A; A; A - External current account balance: 6/30/17; 1/26/18; Q; Q; Q - Exports and imports of goods: 6/30/17; 1/26/18; Q; Q; Q - GDP/GNP: 9/30/17; 1/26/18; Q; Q; Q - Gross external debt: 12/31/17; 1/26/18; Q; A; A - International Investment Position: 9/30/17; 1/24/18; Q; Q; Q ### Debt Sustainability Analysis — Key findings and background - Staff baseline scenario: "Cabo Verde’s risk of external debt distress rating is assessed as high, unchanged from the rating in the previous Debt Sustainability Analysis (DSA)." - Total public and publicly guaranteed debt declined for the first time in a decade in 2017. - Debt expected to reach higher levels over the medium term than projected in the previous DSA due to more gradual fiscal consolidation reflecting the authorities’ latest Medium-Term Fiscal Framework (MTFF). - Public debt remains on highly concessional terms. - Contingent financial liabilities related to SOEs are an additional source of risk. - Authorities' mitigation steps: progress in restructuring SOEs and revenue mobilization efforts. - Recommended complementarities: contain fiscal risks by strengthening public investment management and prudently managing SOE contingent liabilities. - Note on policy performance: "Cabo Verde’s three-year average CPIA score is 3.8, placing the country in the category of a strong policy performers." - Prepared by: "Prepared by the Staffs of the International Monetary Fund and International Development Association March 13, 2018." ### DSA technical coverage and assumptions - DSA uses official debt stock data for end-2016 and additional information available at end December 2017. - Debt coverage includes: - central government external and domestic debt, - external debt contracted by central government on behalf of SOEs ("onlending"), - external debt contracted directly by SOEs that carry a central government guarantee. - Exclusions: - domestic debt contracted directly by SOEs and local governments that carry a central-government guarantee (at end-2016, total publicly guaranteed debt (domestic and external) estimated at about 7 percent of GDP). - non-guaranteed external debt contracted by SOEs is not included. - Outstanding guarantees at end-September 2017 estimated at about 8.5 percent GDP (Text Table 2). - Majority of guarantees is for domestic debt (7.4 percent of GDP) with average interest rate of 6.5 percent. - 2018 budget envisages issuance of guarantees as detailed in Text Table 1 (government guarantees issuance plan, 2018), with totals: - Public: 9.53 (in CVE billion) - Private: 1.48 (in CVE billion) - Total: 11.01 (in CVE billion) - In percent of GDP: 5.3% (Public), 0.8% (Private), 6.1% (Total) - Private external debt: - Estimated about 9.5 percent of GDP at end-2016. - Authorities compile non-bank private sector debt but need more systematic monitoring of repayment flows. ### External debt profile and public debt trends (selected figures) - Text Table 2 / 4 highlights (2015–2017 and 2017 profile): - Total public debt estimated to have declined to 126 percent of GDP at end-2017 from 129.5 percent. - Nominal GDP (billions of Escudos): 158.7 (2015), 163.4 (2016), 170.1 (2017) - Exchange rate (Avg. CPV/USD): 99.4 (2015), 99.6 (2016), 97.7 (2017) - Exchange rate (end period CPV/USD): 101.4 (2015), 104.6 (2016), 91.9 (2017) - Memo item: Other Contingent Liabilities: 24.5 (2015), 23.8 (2016), 25.7 (2017) — percent of GDP: 15.4 (2015), 14.6 (2016), 15.1 (2017) - External vs Domestic debt (Percent of GDP, 2005–2017 snippet): - External debt (selected years): 49.6 (2005), 46.2 (2006), 39.9 (2007), 38.4 (2008), 43.9 (2009), 50.7 (2010), 57.2 (2011), 68.1 (2012), 78.3 (2013), 89.0 (2014), 97.0 (2015), 97.3 (2016), 94.1 (2017) - Domestic debt (selected years): 35.7 (2005), 31.7 (2006), 24.7 (2007), 19.1 (2008), 21.3 (2009), 21.7 (2010), 21.6 (2011), 23.0 (2012), 24.2 (2013), 26.9 (2014), 29.0 (2015), 32.2 (2016), 31.9 (2017) - Total public debt (end-year): 85.3 (2005), 77.9 (2006), 64.6 (2007), 57.4 (2008), 65.2 (2009), 72.4 (2010), 78.8 (2011), 91.1 (2012), 102.5 (2013), 115.9 (2014), 126.0 (2015), 129.5 (2016), 126.0 (2017, preliminary) ### External creditors and debt terms (2017) - Main external creditors: Multilateral institutions (World Bank Group, African Development Bank) are the main external creditors; Portugal is the largest bilateral creditor and subsidizes the largest commercial loan. - External public debt characteristics: long maturity profile and low average interest rate. - Text Table 4 (2017 external debt by creditor, select entries in USD million and Percent of GDP): - Totals (presented in a fragmented table): examples include 1,525.6 (97.5), 1,525.9 (97.7), 1,694.9 (91.6) — (entries reflect staff and authority tables) - World Bank exposures: 342.5 (21.9), 332.8 (21.3), 345.8 (18.7) - African Development Bank: 39.9 (2.5), 39.9 (2.6), 41.1 (2.2) - Portugal exposures: 156.8 (10.0), 152.0 (9.7), 168.0 (9.1) - China: 25.8 (1.6), 24.0 (1.5), 22.8 (1.2) - Commercial: 460.3 (29.4), 461.6 (29.5), 531.5 (28.7) - Text Table 4 summary metrics (percent of total external debt / average grace period / average amortization period / average interest rate): Multilateral 45 / 9 / 320.9% (table fragmented); Bilateral 23 / 8 / 191.1%; Commercial 32 / 9 / 201.6% (presented as in source table fragments). ### Domestic public debt — structure and financing capacity - Domestic public debt about 31.9–32.2 percent of GDP at end-2016/2017. - Banking system holds about 60 percent of domestic debt; remainder held by National Social Security Institute (INPS). - Treasury bonds constitute about 94 percent of domestic debt. - Average maturity of outstanding domestic debt at end-2017: about 5 years. - Average interest rate on domestic debt at end-2017: 5.1 percent. - Government medium- and long-term borrowing strategy per 2018 budget: 60 percent external and 40 percent domestic borrowing. - Liquidity and INPS capacity: - Large surpluses projected for INPS over the medium term (current surplus exceeds 4 percent of GDP). - Excess liquidity in the banking system exceeding 10 percent of GDP. - Suggests projected domestic borrowing is feasible. *Prepared by the Staffs of the International Monetary Fund and International Development Association, March 13, 2018.* ### 6. Cabo Verde is a strong policy performer for the purpose of determining the thresholds ### 6. Cabo Verde is a strong policy performer for the purpose of determining the thresholds under the Debt Sustainability Framework (DSF) ### Policy performance and external debt thresholds - World Bank CPIA averaged 3.8 (scale 1–6) during 2014–16. - Based on 2016 CPIA score, Cabo Verde ranks third among IDA-recipient countries in the sub-Saharan African (SSA) region. - Corresponding external public debt burden thresholds for high risk for strong policy performers (Text Table 5): - Present value of external debt, percent of: GDP 50; Exports 200; Revenue 300. - External debt service in percent of: Exports 25; Revenue 22. - Composition of external debt (2017, percent of total): - Multilaterals 45% - Bilaterals 23% - Commercial 32% ### Baseline scenario underlying the DSA (differences from 2016 Article IV DSA and core assumptions) - Main differences from 2016 Article IV DSA: fiscal consolidation path and authorities’ MTFF expenditure plans (higher public investment); staff projections of revenue in line with current policies. - Growth and price assumptions (Text Table 6, percent of GDP and other indicators; 2016–23): - Real GDP growth, Current DSA: 2016 3.8; 2017 4.0; 2018 4.3; 2019 4.0; 2020 4.0; 2021 4.0; 2022 4.0; 2023 4.0. - GDP Deflator, Current DSA: 2016 -0.8; 2017 0.1; 2018 1.4; 2019 1.6; 2020 2.0; 2021 2.0; 2022 2.0; 2023 2.0. - Fiscal balance (including grants), Current DSA: 2016 -3.1; 2017 -3.0; 2018 -3.2; 2019 -5.9; 2020 -5.2; 2021 -4.6; 2022 -4.1; 2023 -4.1. - Overall financing needs (including onlending), Current DSA: 2016 -6.6; 2017 -4.2; 2018 -8.9; 2019 -8.6; 2020 -6.3; 2021 -5.3; 2022 -4.7; 2023 -4.7. - Current account balance (including grants), Current DSA: 2016 -2.8; 2017 -8.8; 2018 -9.5; 2019 -10.0; 2020 -10.0; 2021 -9.9; 2022 -9.9; 2023 -9.9. - Cv$/USD exchange rate (e-o-y), Current DSA: 2016 104.69; 2017 91.99; 2018 90.79; 2019 90.39; 2020 90.39; 2021 90.49; 2022 90.69; 2023 90.8. - Box 1 macro assumptions (2017–37): - Real GDP growth: settle at about 4 percent per year in the long term. - Medium term (2018–22): fiscal deficit expected to widen to more than 4 percent of GDP under the baseline. - Total financing needs: near 9 percent of GDP in 2018 and 2019; decline to below 5 percent in the medium term; below 4 percent per year in the long run (2023–37) with gradual fiscal consolidation and on-lending coming to an end. - Non-interest current account deficit: projected to widen in the medium term and decline gradually thereafter. - Consumer price inflation and the GDP deflator: projected not to exceed 2 percent. - Financing assumptions: domestic borrowing up to ceiling of 3 percent of GDP initially; long term financing assumed 40 percent domestic borrowing and 60 percent external. Within external financing: 65 percent multilateral and bilateral, 35 percent commercial. ### A. External public debt (DSA findings and vulnerabilities) - Under staff baseline scenario: - PV of external debt to GDP breaches the 50 percent threshold significantly; expected to decrease gradually and fall below 50 percent only by 2032. - Debt service indicators remain below the threshold throughout 2037. - Sensitivities and stress tests: - PV of debt-to-exports and debt-to-revenue ratio, and debt service to revenue ratio would breach thresholds under the historical growth scenario. - Bound test with a one-time 30 percent nominal depreciation shock in 2018 (scenario B6) would cause PV of debt-to-revenue ratio to breach the threshold and debt-service-to-revenue ratio to breach in 2020 (Table 1b, scenario B6). ### B. Total public debt (DSA findings and vulnerabilities) - Total public debt remains above the high-risk benchmark but projected to decline gradually (Table 2a, Figure 2). - PV of total public debt exceeds the 74 percent benchmark and remains above it throughout most of the projection period. - Vulnerabilities: - Prolonged economic slowdown. - Developments in the Euro zone affecting remittances and tourism income. - Realization of losses on contingent liabilities associated with SOEs. - SOE contingent liabilities (end-2016): - Six largest SOEs contingent liabilities represented 38.1 percent of GDP. - Onlending and guarantees on externally-contracted debt represent 23.5 percent of GDP and are included in DSA numerical exercise. - Remaining guarantees on domestically-contracted debt and other liabilities represent 14.6 percent of GDP. - Government will need to assume a portion of these obligations as part of restructuring and privatization; example: national airline (TACV) renegotiation approach. ### C. The authorities’ views - Authorities concurred with DSA results based on staff fiscal path but expect a more ambitious fiscal consolidation over the medium term via revenue mobilization and expenditure rationalization. - Authorities intend to cut expenditures as needed to achieve consolidation. - Authorities differ on external commercial borrowing assumptions and concessionality: - They reiterated that commercial borrowing will remain very low (below 10 percent of the envelope). - They expressed confidence in securing commercial external borrowing on highly-concessional terms. - Current significantly-lower-than-market commercial borrowing rate reflects a special credit facility with back up and subsidy from Portugal, which will not be unwound anytime soon. ### Debt distress classification and overall assessment - Based on external debt burden indicators, the DSA finds the risk of external debt distress remains high, although Cabo Verde retains capability to service its debt. - PV of external debt to GDP threshold is breached over an 11-year period under the baseline and the breach is significant. - Debt service indicators remain below respective thresholds in the baseline but are sensitive to growth or exchange rate shocks. ### Key numeric indicators and projected trajectories (selected) - PV of external debt-to-GDP threshold for high risk (strong policy performers): 50. - External debt service thresholds: Exports 25; Revenue 22. - Composition of external debt (2017): Multilaterals 45%; Bilaterals 23%; Commercial 32%. - Public sector debt (selected projections, percent of GDP, Table 2a): - Public sector debt: 2014 115.9; 2015 126.0; 2016 129.5; 2017 126.9; 2018 125.2; 2019 126.7; 2020 126.2; 2021 124.7; 2022 122.8; 2027 103.8; 2037 75.6. - PV of public sector debt (other indicators): PV of public sector debt-to-revenue and grants ratio (2017-22 average) 390.7; PV of public sector debt-to-revenue ratio (2017-22 average) 435.2. - Debt service-to-revenue and grants ratio: 2017 24.2; 2018 27.7; 2019 27.6; 2020 28.2; 2021 29.6; 2022 32.0; 2027 35.9; 2037 32.0. - Gross financing need: 2014 14.1; 2015 11.7; 2016 10.7; 2017 11.6; 2018 13.1; 2019 13.1; 2020 12.0; 2021 11.4; 2022 11.1; 2027 9.6; 2037 8.3. - Key macro assumptions: Real GDP growth (2016 3.8; 2017 2.7; 2018 3.2; 2019 4.0; long-term 4.0+), Inflation (GDP deflator) projections not to exceed 2 percent. - Sensitivity analysis highlights (Table 1b and Table 2b): - Under historical averages and certain bound tests, PV and ratio indicators can rise substantially (examples in tables indicate large increases under A1, A2, B scenarios). *Statement by Alexandre Tombini, Executive Director for Cabo Verde and Pedro Fachada, Alternate Executive Director — March 26, 2018.* ### 1. On behalf of our Cabo Verdean authorities, we thank the mission team for the ### On behalf of our Cabo Verdean authorities, we thank the mission team for the ### Economic Developments and Outlook - Real GDP grew 4.9 percent year-on-year in the third quarter of 2017 (latest available data), the best performance since the first quarter of 2012. - On a cumulative basis, GDP grew 3.9 percent in the first three quarters of 2017, compared to the same period in 2016. - Growth drivers in 2017: double-digit expansions in the hotel and restaurant, utilities, and manufacturing sectors; declines in agriculture and fisheries attributed to largely one-off factors. - Tourism dynamics: - Traffic of international passengers in Cabo Verde’s airports increased by 18.5 percent in 2017. - Number of nights stayed by visitors increased by 12.3 percent in 2017 (INE data). - Structural factors: marketing of Cabo Verde as a safe and “off the beaten track” alternative, new hotel developments, and expansion in airlinks with main European markets. - Inflation: - Inflation returned to positive territory in 2017. - In the 12-months through February 2018 consumer prices increased by 0.8 percent. - Authorities' view on medium-term growth projections: - Consider staff’s medium-term growth outlook relatively pessimistic. - Attribute part of the difference to backward-looking methodologies that understate potential after structural changes and recent high investment. - The Ministry of Finance estimates GDP growth between 5.0 and 5.5 percent in 2018, with further strengthening expected in following years. ### Fiscal Policy - Public debt as a share of GDP declined for the first time in a decade in 2017. - Overall fiscal deficit was 3 percent of GDP in 2017, in line with authorities’ target; compared to an average fiscal deficit of around 9 percent of GDP in the 2010-2014 period. - In the absence of a specific operation related to the public housing company IFH, the budget would be close to balance (as recognized by staff). - Revenue mobilization and expenditure restraint: - Tax revenues increased from 19.2 percent of GDP in 2015 to an estimated 21.1 percent of GDP in 2017 through measures including fighting tax evasion, combating informality, collecting tax arrears, and strengthening the tax agency. - The Ministry of Finance cut certain approved spending in 2017 to meet the budget target, in accordance with budget legislation. - 2018 fiscal stance: - Authorities target a budget deficit of around 3.1 percent of GDP. - Continue to see space for additional domestic revenue mobilization by combating tax evasion and recovering tax arrears. - Note staff’s recommendation to raise the VAT rate from 15 to 17 percent but are not planning any tax increase at this juncture. - Announced cuts of certain spending categories to alleviate budget pressures (as in 2017). - State-owned enterprises (SOEs): - TACV: withdrew from the domestic market; management transferred to Icelandair Group, which is restructuring international operations and preparing for privatization; new management strategy envisages using Cabo Verde’s central location in the South Atlantic as a hub for intercontinental air traffic. - IFH: part of the stock of low-income houses transferred to municipal governments; sale of middle-income houses to the public was accelerated. - Electra: advanced internal process to increase operational efficiency, reduce commercial losses and prepare for privatization. - Debt sustainability and objectives: - Despite the 2017 decline, public debt-to-GDP ratio remains very high. - Debt service is manageable with no medium-term sustainability concern given long maturity profile and highly concessional terms of external debt (as recognized by staff). - Authorities intend to continue gradual fiscal consolidation and attain a balanced budget by 2021. - Authorities welcome staff’s recommendation to anchor fiscal policy with the objective of reducing the present value of external public debt to below 55 percent of GDP by 2023 from 67 percent in 2017. ### Monetary Policy and Financial Stability - Exchange rate and reserves: - Banco de Cabo Verde (BCV) continued to support the exchange rate peg with the euro. - Staff assessment: real exchange rate broadly in line with economic fundamentals; international reserves are adequate. - International reserves stood at 5.6 months of prospective imports of goods and services (2017). - Monetary policy in 2017: - In absence of inflation or international reserves pressures, monetary policy remained accommodative. - BCV reduced the policy rate by 200 basis points to 1.5 percent in June 2017. - BCV adopted measures to improve communication and the transmission mechanism of monetary policy. - Banking sector: - Remains relatively well capitalized and liquid, despite high legacy non-performing loans (NPLs) and low profitability. - BCV continues to work with banks to resolve legacy NPLs and stimulate credit. - Correspondent banking relationships: - Cabo Verde affected by withdrawal of correspondent banking relationships due to small size of domestic market and rising due diligence costs, particularly for operations in US dollars. - Cabo Verde has a comprehensive anti-money laundering/combating the financing of terrorism (AML/CFT) framework; BCV is cooperating with foreign supervisors and intergovernmental bodies to address the issue. ### Structural Reforms - Authorities view implementation of structural reforms as fundamental to increasing potential growth, generating jobs, and improving welfare. - Emphasis on private sector participation to ensure long-term economic growth and sustainability. - Priority reform areas: business environment reforms, better education and vocational training, improved access to financing, and privatization of inefficient SOEs — expected to crowd-in private investment, innovation, diversification, productivity, and competitiveness. - 2017-2021 Strategic Plan for Sustainable Development (PEDS): - Lays out medium-term growth vision and redefines Cabo Verde’s regional and global position. - Envisages tourism as main driver of growth and Cabo Verde as a viable hub for air and maritime transportation and a regional business center. - Plans to develop the digital economy and push forward diversification to attract domestic and foreign investment. *Source: Cabo Verdean authorities' statement to the IMF Article IV consultation (text provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18104.pdf_