## 1cpvea2020001 ## Source details **Canonical URL:** [1cpvea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1cpvea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1cpvea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1cpvea2020001.pdf.json) --- ### Recent Economic Developments - Real GDP expanded by "6.1 percent" through end-September 2019 and is expected to reach "5.5 percent" for the year. - Inflation rose to "1.9 percent (y/y)" in December 2019, up from "1 percent" at end-2018. - Current account deficit expected to narrow to "3 percent of GDP" in 2019 (was "5.3 percent of GDP" in 2018). - International reserves projected at "5.5 months of prospective imports of goods and services"; final data: international reserves totalled "€661 million" at end-December 2019. - Credit to the economy rose marginally by "2.9 percent" through end-November 2019; broad money expanded by "5.2 percent" at end-November 2019 compared with end-December 2018. - Excess liquidity in banking system driven by strong migrants’ deposits and low credit extension. ### Fiscal Developments and Key Fiscal Statistics - Primary surplus at end-September 2019 was well-above the program target; programmed primary surplus for 2019 of "0.7 percent of GDP" expected to be achieved. - Revenue shortfalls driven by: (i) taxes on international trade due to lower-than-anticipated imports; (ii) nontax revenue—property income below projections; (iii) delays in disbursement of grants tied to slower capital outlay execution. - Expenditure undershoot due to under-execution of public investments; procurement delays for externally-financed projects. - Overall fiscal deficit slightly better than projected and about "1 percentage point of GDP" lower than in 2018. - Financing needs estimated at "5 percent of GDP" for 2019 (program estimate "6.5 percent"). - Central government debt-to-GDP ratio projected at "123 percent" (down from "124 percent of GDP" in 2018); public debt preliminary data around "122.5 percent" at end-2019 in some tables. ### Sovereign Private Investment Guarantee Fund (SPIGF) — Setup, Planned Use, and Risks - SPIGF to be funded with resources from the offshore Trust Fund (TF) established in 1998. - TF historical stock: domestic debt swapped totaling "CVE 11.35 billion (equivalent to €103 million)"; at end-December 2019 TCMFs totaled "CVE 11.33 billion (equivalent to €102.7 million)" held by BCV ("CVE 4.6 billion") and INPS ("CVE 6.7 billion"). - Offshore account at end-2019: "€106 million"; corresponding liabilities "€102.7 million (5.7 percent of GDP)". - Planned allocations from the offshore account under SPIGF plan: - SPIGF initial capital: "€90 million". - Emergency Fund: "€10 million" for rapid response to natural disasters. - Balance to government budget: "€6 million". - Under the plan: SPIGF will issue a bond to the Treasury; Treasury will issue bonds at "3 percent" interest to replace TCMFs, with debt service paid by the Treasury. - Staff cautions: creation and capitalization of SPIGF as planned would increase public gross debt by "5.7 percent of GDP" and may raise debt service obligations, creating quasi-fiscal risks if guarantees are called and potential asset-liability mismatches. - Authorities agreed to prepare a Strategy Note (new reform target) to address issuance and repayment of replacement bonds, statistical recording, legal framework, governance, asset management principles, accumulation/withdrawal rules, transparency and accountability, expected revenues and projected costs, and mechanisms to ensure the fund is not loss-making; timing: to be completed by end-April 2020 and before operationalization. ### Performance Under the PCI and Program Monitoring - Strong program performance: - All but one quantitative targets for end-September 2019 were met; the floor on international reserves exceeded by a wide margin. - The tax revenue floor narrowly missed due to shortfall in taxes on international trade. - All non-quantitative continuous targets met. - All reform targets completed on or before scheduled dates. - Specific reform achievements: - Compilation of financial information on cash flow performance of six key SOEs for FY2019. - Release of minutes of the Monetary Policy Committee meetings beginning June 2019. - Review report on tax exemptions; submission of the 2020 budget in line with program commitments. - Quarterly monitoring of actual performance of 6 key SOEs starting end-December 2019. - Reduction of the overnight interest rate corridor by "150 basis points" in June 2019. - Staff supports completion of the first PCI review (test date: "September 30, 2019"; review date: "March 1, 2020") and modification of quantitative targets for the second and third reviews (second review test date: "March 31, 2020"; review date: "September 2, 2020"; third review test date: "September 30, 2020"; review date: "January 15, 2021"). ### Medium-term Outlook and Projections - Real GDP growth projected to stabilize at "5 percent" in 2020 and over the medium term. - Inflation projected to remain below "2 percent" over the medium term. - Current account deficit expected to widen in 2020 as import demand accelerates, then improve to reach "3 percent of GDP" by 2024. - International reserves projected to be maintained at "5.5 months of prospective imports of goods and services". - Medium-term fiscal framework objectives: - Revenues projected at "around 28 to 29 percent of GDP during 2020-24". - Expenditure expected to decline to "about 30 percent of GDP" during 2020-24. - Capital outlays projected at "around 4 percent of GDP". - Social outlays projected at "around 7 percent of GDP". - Projected primary surplus: "1.3 percent of GDP over the medium term". - Debt and financing projections: - Overall fiscal deficit projected to narrow from "1.7 percent of GDP in 2020" to "0.6 percent of GDP in 2024". - Central government debt projected to decline from an estimated "123 percent of GDP at end-2019" to "91.9 percent of GDP by end-2024". - 2019 joint IMF/World Bank DSA assessed Cabo Verde’s risk of external and total debt distress as "high"; under staff’s revised projections, possible graduation to moderate risk for external debt by "2023" and for total public debt by "2025". - Caveat: creation of SPIGF could have implications for these projections; staff and authorities plan analysis at the second program review. ### 2020 Budget, Composition, and Key Fiscal Figures - Program objective: achieve programmed primary surplus of "1 percent of GDP" for 2020. - Budgeted overall deficit: "1.7 percent of GDP". - Financing needs: "3.9 percent of GDP" ("0.2 percentage points of GDP above the program level"). - Budgeted revenue: "32.5 percent of GDP" predicated on projected strong economic activity and measures from 2019 and new administrative measures. - One-off measures with estimated impact of "2 percent of GDP": privatization receipts (conservative), higher project grants "(0.9 percent of GDP)", revenue from institutions now covered in central government statistics, higher collection of tax arrears and compensation of cross-liabilities "(0.8 percent of GDP)". - Expenditure projected at "34.2 percent of GDP" (versus "31.8 percent of GDP under the original program")—increase mainly in goods and services and capital outlays. - Selected figures from Text Table 2 (percent of GDP across years/programs): - Total revenue: "28.2", "31.7", "29.4", "30.4", "32.5", "31.2". - Tax Revenue: "22.0", "21.8", "21.3", "21.9", "22.9", "22.6". - Grants: "1.4", "2.8", "2.6", "1.9", "2.8", "2.2". - Total expenditure: "31.0", "33.9", "31.3", "31.8", "34.2", "32.4". - Primary balance: "-0.3", "0.7", "0.7", "1.0", "1.0", "1.2". - Overall balance: "-2.8", "-2.2", "-1.9", "-1.5", "-1.7", "-1.1". - Financing needs: "3.8", "6.5", "5.0", "3.7", "3.9", "2.1". ### Monetary Policy and Financial Sector - BCV policy rate maintained at "1.5 percent". - June 2019 measures: reduction of the overnight interest rate corridor by "150 basis points"; establishment of a symmetric interest rate corridor. - Banks’ average lending rates declined by "about 0.4 percent" during June-September 2019; reported decline from "10 percent" in June 2019 to "9.6 percent" in October 2019. - BCV recapitalization planned: "CVE 2.1 billion during 2019–21" with earlier tranche "CVE 700 million" in late December 2019 and "CVE 300 million" in 2020 budget; BCV equity position at end-2018 was negative "(CVE -2.7 billion)" and capital level of "CVE 200 million" remains low. - Financial sector indicators: - Regulatory capital to risk-weighted assets: "17 percent at end-September 2019" (regulatory minimum "12 percent"). - Non-performing loans (NPLs): "12 percent" (or "12.1 percent"/"12.2 percent" in related tables) of total loans at end-September 2019; legacy loans constitute "70 percent of total NPLs". - Planned financial sector reforms and targets for 2020: - Revamp the credit registry and information system (Reform Target by end-December 2020). - Set up a functional central registry of mobile collateral (Reform Target by end-December 2020). - Develop a centralized official balance sheets database for the corporate sector. - Establish the National Commission for the development of the financial system. - Ensure proper functioning of the Financial Stability Committee and the National Commission with appointments and operating regulations. ### SOE and Structural Reform Agenda - SOE privatizations and concessions planned (subject to market conditions, timelines for 2020): - Privatizations: INPHARMA (June 2020); EMPROFAC (June 2020); ELECTRA (December 2020); CV Handling (June 2020). - Sale of remaining State’s shares (39 percent) in CVA planned in First quarter 2020. - Granting concessions for port services (ENAPOR, May 2020) and airport services (ASA, June 2020). - SOE oversight strengthened: compilation of cash flow information on six key SOEs; quarterly monitoring reports initiated end-December 2019. - Structural reform priorities under PEDS: improve business environment, education and vocational training, support for SMEs through Pro Garante, Pro Capital, Pro Empresa expected to be fully operational in 2020. ### Risk Assessment and Policy Responses - Major risks, relative likelihood, impact, and policy responses (selected): - Weaker-than-expected global growth: Relative likelihood "High"; Impact if realized "Medium/High". Policy response: Accelerate structural reforms; build external and fiscal buffers. - Large swings in energy prices: Relative likelihood "Medium"; Impact "Medium/High". Policy response: Build fiscal buffers and accelerate structural reforms. - Sharp rise in risk premia exposing financial vulnerabilities: Relative likelihood "High"; Impact "Medium". Policy response: Tighten monetary policy when needed; accelerate growth-enhancing reforms. - Rising protectionism and retreat from multilateralism: Relative likelihood "High"; Impact "Medium". Policy response: Build external buffers and accelerate growth-enhancing reforms. - Higher frequency and severity of natural disasters: Relative likelihood "Medium/Low"; Impact "Medium/High". Policy response: Build resilience to weather-related shocks and accelerate growth-enhancing reforms. - Coronavirus outbreak (COVID-19): Relative likelihood "Medium"; Impact "Medium". Policy response: Build resilience to shocks and accelerate growth-enhancing reforms. - Faltering fiscal consolidation efforts: Relative likelihood "Medium/High"; Impact "High". Policy response: Advance revenue-enhancing reforms; improve capital expenditure management; reduce fiscal risks linked to SOEs; contain non-priority spending. - Delays in productivity-increasing measures and SOE restructuring: Relative likelihood "Medium"; Impact "Medium". Policy response: Accelerate structural reforms; reduce the State’s role in productive activities; enhance growth potential. ### COVID-19: Potential Impact, Preparedness, and Policy Implications - Context: No confirmed cases reported at time of reporting; tourism accounts for about "25 percent of GDP" and some "50 percent of export receipts"; UK accounts for about "25 percent of arrivals". - Authorities’ preliminary estimate of shock: real GDP contraction of "4 percent in 2020". - Potential impacts if current situation persists through end-September 2020: - Tourism arrivals decline close to "60 percent" in 2020 with similar decline in tourism receipts. - Transport and communications (over "15 percent of GDP") to contract significantly; CVA almost grounded. - Imports may decline due to lower commodity prices, notably petroleum; however deterioration in services balance likely to dominate. - Remittances may decline; past experience shows remittances can increase after shocks but a global COVID-19 shock may make such increases challenging. - Preparedness measures undertaken: - Preventive actions: body temperature scans in airports; suspension of official travel and flights to China and other affected countries; quarantine areas prepared. - Contingency response: contingency plan, rapid response team, emergency plan with initial funding of "CVE 76 million (0.04 percent of GDP)" by reallocating budget appropriations. - On March 17 authorities introduced further travel restrictions including suspension of flights from affected European countries, the United States, Brazil, Senegal and Nigeria, and maritime traffic (with exceptions). - Staff response: not proposing program target adjustments immediately; working with authorities on a revised macroeconomic baseline and potential additional financing; recognized COVID-19 implications as "constantly evolving." ### Policy Recommendations and Priorities - Fiscal policy: - Advance revenue-enhancing reforms; increase tax administration efficiency; broaden the tax base; rationalize exemptions; strengthen tax arrears collection. - Improve capital expenditure management and procurement procedures; contain non-priority current expenditure. - SPIGF: prepare and finalize the Strategy Note addressing governance, asset-liability treatment, issuance and repayment of replacement bonds, statistical recording, transparency, and safeguards before operationalization. - Financial sector: - Reduce legacy NPLs; implement asset quality review recommendations; strengthen supervision and risk management; revamp credit registry; create mobile collateral registry. - Enhance AML/CFT framework to preserve correspondent banking relationships; establish national commission by end-2020. - Structural reforms: - Accelerate SOE privatizations and concessions; improve SOE oversight and reporting; advance business climate reforms to support SME development and attract FDI. - Monetary policy: - Maintain current stance at "1.5 percent" while monitoring euro area developments; continue reserve accumulation and liquidity management measures to protect the peg. *Source: 1cpvea2020001 - IMF staff report excerpt and Program Statement.* ### 1. The Sovereign Private Investment Guarantee Fund – Background _____________________________ 6 ### 1. The Sovereign Private Investment Guarantee Fund – Background ### Recent Economic Developments - Real GDP expanded by 6.1 percent through end-September 2019 and is expected to reach 5.5 percent for the year. - Inflation rose to 1.9 percent (y/y) in December 2019, up from 1 percent at end-2018. - The current account deficit is expected to narrow to 3 percent of GDP in 2019 (5.3 percent of GDP in 2018). - International reserves are projected at 5.5 months of prospective imports of goods and services. - Credit to the economy rose only marginally at end-September 2019, consistent with banks’ prudent lending practices and reduced exposure to SOEs. - Strong growth in migrants’ deposits and low credit extension contributed to increased excess reserves in the banking system. ### Fiscal Developments and Key Fiscal Statistics - The primary surplus was well-above the program target at end-September 2019, with both revenue and expenditure lower than projected. - Revenue shortfalls: (i) taxes on international trade due to lower-than-anticipated imports; (ii) nontax revenue—property income below projections; (iii) delays in disbursement of grants tied to slower capital outlay execution. - Expenditure undershoot: under-execution of public investments, mainly due to lengthy procurement processes for externally-financed projects. - Programmed primary surplus of 0.7 percent of GDP will be achieved for 2019. - The overall fiscal deficit will be slightly better than projected, and about 1 percentage point of GDP lower than in 2018. - Net other liabilities (NOLs) were below the program target at end-September 2019. - Financing needs are estimated at 5 percent of GDP for 2019 (6.5 percent under the program). - Central government debt-to-GDP ratio is projected at 123 percent (down from 124 percent of GDP in 2018), above the original forecast of 121.4 percent of GDP because of unfavourable exchange rate projections. ### Sovereign Private Investment Guarantee Fund (SPIGF) — Setup and Planned Use - The authorities created the SPIGF funded with the offshore trust fund (TF) established in 1998. - TF historical context: - Resources mobilized to swap a stock of domestic debt totaling CVE 11.35 billion (equivalent to €103 million) with twenty-year bonds (Titulos Consolidados de Mobilizacão Financeira – TCMFs). - At end-December 2019, TCMFs totaled CVE 11.33 billion (equivalent to €102.7 million) and were held by BCV (CVE 4.6 billion) and INPS (CVE 6.7 billion). - As of end-2019, the offshore account had €106 million; corresponding liabilities amounted to €102.7 million (5.7 percent of GDP). - Planned allocations from the offshore account under the SPIGF plan: - SPIGF initial capital: €90 million. - Emergency Fund: €10 million for rapid response to natural disasters. - Balance to government budget: €6 million. - Under the plan, the SPIGF will issue a bond to the Treasury; the Treasury will issue bonds at 3 percent interest rate to replace the TCMFs, with debt service paid by the Treasury. - The creation and planned capitalization of the SPIGF, as currently planned, would increase public gross debt by 5.7 percent of GDP and may raise debt service obligations, with implications for debt sustainability. - Authorities will prepare a strategy on the operationalization of the SPIGF, which is a new reform target, in consultation with staff. ### Background on the Offshore Trust Fund and TCMFs - Late 1990s context: domestic debt overhang—at end-1997 domestic debt was US$186 million (about 46 percent of GDP). - Debt reduction operation: CVE 11.35 billion of domestic debt covered, held by BCV (CVE 4.6 billion), BCA (CVE 6.4 billion), INPS (CVE 328 million), Garantia (CVE 22 million). - TF established by law in August 1998; TCMFs issued to swap the domestic debt stock and paid dividends from TF. - TCMFs were to be repaid over 20 years using budgetary resources but were not repaid as planned and all matured in 2018. - In December 2018 the government issued a Decree for partial repayment and replacement of remaining TCMFs with new 20-year bonds at up to 3 percent interest; some TCMFs redeemed in January 2019 and partial repurchases completed. ### Performance Under the PCI (Program for Credible Implementation) - Performance was strong: - All but one quantitative targets for the end-September 2019 test date were met; the floor on international reserves was exceeded by a wide margin. - The target on tax revenue was narrowly missed due to a shortfall in taxes on international trade. - All non-quantitative continuous targets were met. - All reform targets completed either on or before scheduled date. - Reform targets met included: compilation of financial information on cash flow performance of six key SOEs for FY2019; release of minutes of the Monetary Policy Committee meetings. - Additional reforms completed Oct–Dec 2019: review report on tax exemptions; submission to parliament of the 2020 budget in line with program commitments; quarterly monitoring of actual performance of 6 key SOEs starting end-December 2019; reduction of the excessively wide overnight interest rate corridor. ### Outlook and Key Projections - Medium-term outlook: - Real GDP growth projected at 5 percent, supported by industry, services, transport, planned large infrastructure projects, and growth-enhancing reforms under the PEDS. - Inflation projected to remain below 2 percent over the medium term. - Current account deficit expected to widen in 2020 as import demand accelerates, then improve to reach 3 percent of GDP by 2024. - International reserves projected to be maintained at 5.5 months of prospective imports of goods and services, supported by strong export performance, increasing remittances, and projected private capital inflows. ### Risk Assessment — Major Risks and Policy Responses (selected) - Weaker-than-expected global growth: Relative likelihood High. Impact if realized Medium/High. Policy response: Accelerate structural reforms; build external and fiscal buffers. - Large swings in energy prices: Relative likelihood Medium. Impact if realized Medium/High. Policy response: Build fiscal buffers and accelerate structural reforms. - Sharp rise in risk premia exposing financial vulnerabilities: Relative likelihood High. Impact if realized Medium. Policy response: Tighten monetary policy when needed; accelerate growth-enhancing reforms. - Rising protectionism and retreat from multilateralism: Relative likelihood High. Impact if realized Medium. Policy response: Build external buffers and accelerate growth-enhancing reforms. - Higher frequency and severity of natural disasters: Relative likelihood Medium/Low. Impact if realized Medium/High. Policy response: Build resilience to weather-related shocks and accelerate growth-enhancing reforms. - Coronavirus outbreak: Relative likelihood Medium. Impact if realized Medium. Policy response: Build resilience to shocks and accelerate growth-enhancing reforms. - Faltering fiscal consolidation efforts: Relative likelihood Medium/High. Impact if realized High. Policy response: Advance revenue-enhancing reforms; improve capital expenditure management; reduce fiscal risks, notably linked to SOEs; contain non-priority spending. - Delays in implementing measures to increase productivity and restructure SOEs: Relative likelihood Medium. Impact if realized Medium. Policy response: Accelerate structural reforms to improve the business environment; reduce the State’s role in productive activities; enhance growth potential. ### Policy Discussions — Priorities - Discussions prioritized measures to: - Enhance revenue mobilization and expenditure management. - Strengthen the banking system. - Accelerate structural reforms, particularly in the SOEs sector. - Address issues related to the operationalization of the Sovereign Private Investment Guarantee Fund. *Source: 1cpvea2020001 - 1. The Sovereign Private Investment Guarantee Fund – Background (IMF).* ### 7. The medium-term fiscal framework continues to focus on achieving primary surpluses ### 7. The medium-term fiscal framework continues to focus on achieving primary surpluses ### Medium-term fiscal framework: objectives and projections - Objective: achieve primary surpluses to strengthen the fiscal position and reduce debt. - Revenues projected at "around 28 to 29 percent of GDP during 2020-24" as measures broaden the tax base, increase administrative efficiency, and rationalize exemptions. - Expenditure expected to decline to "about 30 percent of GDP" during 2020-24. - Capital outlays projected at "around 4 percent of GDP". - Social outlays projected at "around 7 percent of GDP". - Projected primary surplus: "1.3 percent of GDP over the medium term". - Staff view: biggest challenge is strengthening and securing revenue collection despite demonstrated ability to control spending when revenues fall short. ### Financing needs, debt projections, and debt sustainability - Overall fiscal deficit projected to narrow from "1.7 percent of GDP in 2020" to "0.6 percent of GDP in 2024". - Expected reduction in capitalization and onlending to SOEs consistent with structural reforms will contribute to reduced financing needs. - Central government debt projected to decline from an estimated "123 percent of GDP at end-2019" to "91.9 percent of GDP by end-2024". - 2019 joint IMF/World Bank DSA assessed Cabo Verde’s risk of external and total debt distress as "high". - Under staff’s revised medium-term projections, the country could graduate to: - moderate risk for external debt by "2023" - moderate risk for total public debt by "2025" - Caveat: creation of the SPIGF, as envisaged, could have implications for these projections; staff and authorities plan analysis at the second program review. ### 2020 budget: consistency with program and composition - Program objective: achieve the programmed primary surplus of "1 percent of GDP". - Budgeted overall deficit: "1.7 percent of GDP" (slightly above program projections). - Financing needs: "3.9 percent of GDP"—"0.2 percentage points of GDP above the program level". - Budgeted revenue: "32.5 percent of GDP", predicated on: - projected strong economic activity, - full year impact of measures introduced in 2019, - new administrative measures (broadening tax base, tax exemption overhaul, improved compliance, digitalization of revenue administration). - One-off measures with estimated impact of "2 percent of GDP": - potential privatization receipts (projected conservatively); - higher project grants "(0.9 percent of GDP)"; - revenue from some public institutions now covered in central government statistics (hospitals, universities, the judiciary, security agencies); - higher collection of tax arrears and compensation of cross-liabilities between the Treasury and some companies, including SOEs "(0.8 percent of GDP)". - Expenditure projected at "34.2 percent of GDP" (versus "31.8 percent of GDP under the original program"). - Increase mainly in goods and services due to broadening of fiscal coverage and cross-liabilities compensation. - Significant increase in capital outlays to improve public investment execution and start the water and sanitation project for Santiago island. - Key figures from Text Table 2 (selected): - Total revenue: "28.2", "31.7", "29.4", "30.4", "32.5", "31.2" (Percent of GDP across years/programs). - Tax Revenue: "22.0", "21.8", "21.3", "21.9", "22.9", "22.6". - Grants: "1.4", "2.8", "2.6", "1.9", "2.8", "2.2". - Total expenditure: "31.0", "33.9", "31.3", "31.8", "34.2", "32.4". - Primary balance: "-0.3", "0.7", "0.7", "1.0", "1.0", "1.2". - Overall balance: "-2.8", "-2.2", "-1.9", "-1.5", "-1.7", "-1.1". - Financing needs: "3.8", "6.5", "5.0", "3.7", "3.9", "2.1". ### Public financial management and budget execution measures - Planned measures for 2020: - introduction of electronic billing; - adoption of the plan for public acquisitions and E-procurement. - World Bank technical assistance to enhance the Medium-Term Fiscal Framework. - Continued use of the Treasury cashflow monitoring plan and the PAYLOG system to strengthen expenditure management and prevent payment arrears. - Staff encouraged continuation of mid-term budget execution reviews to identify corrective measures. ### Sovereign Private Investment Guarantee Fund (SPIGF): concerns and required Strategy Note - Authorities' stated motives for using offshore TF resources to set up SPIGF and an emergency fund: - facilitate access to finance for capital-intensive private investments; - avoid flooding the banking system with liquidity (5.7 percent of GDP if TF resources were used immediately to repay TCMFs); - improve preparedness to respond to exogenous shocks affecting vulnerable groups. - Staff concerns: - potential quasi-fiscal risks if guarantees are called; - uncertainties on yields from the fund relative to coverage of liabilities; - potential mismatch between assets and liabilities from allocation of TF resources. - Agreed action: authorities to prepare a Strategy Note (new reform target) addressing: - issuance and repayment of bonds replacing the TCMFs; - statistical recording of assets and liabilities in public finance statistics; - key aspects of the legal framework governing SPIGF management and operations. - Timing: Strategy Note to be prepared in time for the second PCI review. ### Monetary policy stance and financial sector reforms - BCV policy rate maintained at "1.5 percent". - Recent monetary policy transmission measures: - June 2019 reduction of the overnight interest rate corridor to "150 basis points"; - establishment of a symmetric interest rate corridor with overnight rates linked to the policy rate. - Some decline in banks’ lending rates of "about 0.4 percent" during June-September 2019. - BCV began publishing minutes of the Monetary Policy Committee meetings in June. - Reserves and precautionary accumulation encouraged to protect the peg. - BCV recapitalization planned: "CVE 2.1 billion during 2019–21". - At end-2018 BCV equity position was negative "(CVE -2.7 billion)". - Staff recommendation: more resources may be needed given the widening negative equity gap; BCV’s capital level of "CVE 200 million" remains low. - A safeguards assessment of the BCV expected before the end of the year. ### Financial stability and sectoral reform priorities - Banking sector indicators: - Regulatory capital to risk-weighted assets: "17 percent at end-September 2019" (regulatory minimum "12 percent"). - Non-performing loans (NPLs): "12 percent of total loans at end-September 2019". - Legacy loans constitute "70 percent of total NPLs". - Staff urged continued work to reduce legacy NPLs to foster credit growth; some banks have written off legacy loans. - Planned 2020 actions (reform targets and initiatives): - revamp the credit registry and information system (Reform Target); - set up a functional central registry of mobile collateral (Reform Target); - develop a centralized official balance sheets database for the corporate sector; - establish the National Commission for the development of the financial system. - Divestment plans: authorities reaffirmed plan to sell the shares acquired in Caixa Economica in 2019; discussions ongoing with a potential investor and sale via the Stock Exchange being considered. - Correspondent banking relationships: CBR loss has been marginal; ongoing implementation of the AML/CFT framework in line with FATF requirements is important. Authorities plan to establish a national commission by end-2020 to evaluate AML/CFT risks. ### Structural reforms and SOEs agenda - Importance: advancing SOE reforms to enhance growth prospects and build resilience to shocks. - Progress and examples: - Cabo Verde Airline (CVA) privatized in March 2019; established hub in Sal island and opened new routes in Africa, North and South America. - Improved SOE oversight mechanisms and compilation of cash flow information to detect inefficiencies and reduce fiscal risks. - 2020 SOE reform agenda (updated timeline; objective to complete by end-2020 subject to market conditions): - privatization of four companies in: energy (ELECTRA), health (INPHARMA, EMPROFAC), transport (CV Handling); - granting concessions for port (ENAPOR) and airport (ASA) services. - Note: ELECTRA undergoing cost-cutting measures to prepare for privatization; other SOEs have positive income positions and expected to generate privatization revenue. - Broader structural reforms under PEDS: - improve business environment; - education reforms and increased vocational training for skills building; - support for SMEs through a 2019 financial ecosystem: Pro Garante (loan guarantees), Pro Capital (venture capital), Pro Empresa (capacity building); these three institutions expected to be fully operational in 2020. ### Program modalities, targets, and appraisal - Modification of quantitative targets based on updated 2020 projections for end-March 2020 and end-September 2020 on: tax revenue, primary balance, net other liabilities, new concessional external debt of the central government, and net international reserves. - Reasons for target modifications include: - disbursement delay of a loan financing a water and sanitation project moved from 2019 to early 2020 (affecting primary balance floor and concessional external debt ceiling); - updated capitalization and onlending operations affecting net other liabilities at end-March; - better targeting of quarterly revenue collection (lower-than-programmed floor on tax revenue for end-September); - revised external position projections supporting higher reserve accumulation at end-September. - New reform target proposed for end-April 2020: preparation of the SPIGF Strategy Note in line with best practice. - Financing for the 2020 program: - fully financed with loans from the World Bank and the African Development Bank, and government securities issued in the domestic market capped at "3 percent of GDP". - Cabo Verde does not face present, potential or prospective balance of payments needs and is not seeking IMF financial support. - Staff appraisal highlights: - credit for maintaining reform momentum and enhancing macroeconomic stability; - PEDS implementation proceeding well; all reform targets for first program review met; all but one quantitative targets at end-September 2019 achieved. - Economy: strong growth, low inflation, improving external position; medium-term prospects positive but downside risks present. - Fiscal recommendations reiterated: advance revenue-enhancing measures, increase tax administration efficiency, strengthen monitoring of fiscal risks, increase tax compliance, streamline exemptions, restrain current expenditures, improve capital outlay management, and strengthen procurement procedures. - Reducing public debt-to-GDP ratio remains a key medium-term objective; achieving debt-to-GDP below 100 percent requires sustained growth, fiscal consolidation, successful SOE reforms, and reliance on concessional financing. - Note: creation of the SPIGF could impact progress on debt reduction. *Source: IMF staff report excerpt provided in the content unit.* ### 25. Staff welcomed the authorities’ plan to prepare a Strategy Note ahead of the ### 25–28: Staff assessment and policy recommendations ### Sovereign Private Investment Guarantee Fund (SPIGF) — Strategy Note - Staff welcomed the authorities’ plan to prepare a Strategy Note ahead of the operationalization of the Sovereign Private Investment Guarantee Fund and urged its swift preparation. - The Note is essential to ensure that critical aspects of assets management and liabilities coverage related to the use of the offshore trust fund set up in 1998 will be thoroughly addressed. - Of particular importance will be: - sound governance and safeguards mechanisms needed to support the efficient functioning of the SPIGF, and - the repayment plan for bonds backed by resources in the offshore account. ### Monetary policy stance and transmission - The monetary policy stance remains appropriate and recent measures to improve the monetary policy transmission mechanism are welcome. - Staff concurred with the BCV that in the current environment of low inflation and adequate level of reserves, a change in the monetary policy stance was not warranted. - As in the past, the BCV should continue to closely monitor developments in the euro area and stand ready to tighten monetary policy if pressures on reserves and prices emerge. - The recent narrowing of the overnight interest rates corridor has contributed to some lowering of lending rates, a welcome development given the tepid credit expansion. ### Correspondent banking relationships and AML/CFT - Maintaining correspondent banking relationships (CBRs) is important given Cabo Verde’s dependence on remittances and migrant deposits. - It is encouraging that the country has been able to maintain CBRs in recent years. - Staff stressed that it was essential to continue the implementation of the AML/CFT framework in line with FATF requirements to prevent loss of CBRs. ### Structural reforms, SOE privatization, and private sector development - Staff welcomed progress in structural reforms. - Decisive actions taken in 2019 to privatize and restructure SOEs, particularly for air and maritime transportation, and to enhance monitoring of their financial situation have had encouraging results. - These actions should serve as a stepping stone to advance the remaining reform agenda. - Staff encouraged the authorities to advance broad-based reforms to support private sector development, particularly small and medium-sized enterprises, to enhance growth prospects. *Source: IMF staff assessment (excerpt).* ### 29. Staff supports the completion of the first review under the PCI and the modification of ### 1cpvea2020001 - 29. Staff supports the completion of the first review under the PCI and the modification of ### Overview - Staff supports the completion of the first review under the PCI and the modification of quantitative targets for the second and third reviews. - The authorities presented a revised Program Statement committing to policies and reforms needed to foster macroeconomic stability. ### Performance against quantitative and reform targets - As of end-September 2019, all quantitative targets were met except for the floor on tax revenue. - The nonobservance of the tax revenue floor was described as minor and was caused by lower-than-projected taxes on international trade. - All reform targets were met. ### Staff recommendation - In view of the observed performance and the authorities’ commitment, staff supports: - Completion of the first PCI review (first review test date: September 30, 2019; review date: March 1, 2020). - Modification of quantitative targets for the second and third reviews (second review test date: March 31, 2020; review date: September 2, 2020; third review test date: September 30, 2020; review date: January 15, 2021). *Source: Cabo Verde — IMF staff assessment and program documents.* ### Appendix I. Program Statement ### Appendix I. Program Statement ### A. Recent Economic and Financial Developments - Real GDP growth: 4.9 percent in 2016; 3.7 percent in 2017; 5.1 percent in 2018; 6.1 percent through Q3 2019 (January–September 2019). Real GDP is expected to expand by 5.5 percent in 2019. - Key growth drivers: construction, industry, commerce, tourism, and positive developments in the transport sector (including privatization of the airline and expansion of international routes). - Inflation: 0.3 percent in 2017; spike to 1 percent year on year in 2018; 0.7 percent in October 2019; 1.9 percent at end-December 2019 (mainly due to higher food prices). - External position and reserves: - Current account deficit: 7.9 percent of GDP in 2017; 5.3 percent of GDP in 2018; 1.5 percent of GDP at end-September 2019. - Gross international reserves: €630 million in September 2019 (equivalent to 6 months of prospective imports of goods and services). - Revised projections: current account deficit of 3 percent of GDP in 2019 and international reserves at €608 million. - Final data: international reserves totalled €661 million at end-December 2019. - Money and credit: - Broad money expanded by 5.2 percent at end-November 2019 compared with end-December 2018. - Credit to the economy rose 2.9 percent through end-November 2019 compared with end-December 2018. - Factors limiting credit growth: high non-performing loans, reduced demand from Cabo Verde Airlines (CVA) and some SOEs, and write-offs of non-performing loans by some banks. - Monetary policy and interest rates: - BCV reduced the overnight lending facility interest rate from 4.5 percent to 3.0 percent in June 2019. - Banks’ average lending rates declined from 10 percent in June 2019 to 9.6 percent in October 2019. - Deposit interest rates remained stable during the same period. - Financial sector soundness: - Non-performing loans: 12.1 percent at end-September 2019. - Government acquisition of 27 percent of Caixa Economica in 2019 to preserve correspondent banking relationships; planned sale of these shares to private investors in 2020. - Public debt trajectory: - Public debt-to-GDP: 125.9 percent in 2017; 124 percent at end-2018; projected 123 percent at end-December 2019. ### B. Budget Execution at end-September and 2019 Projections - End-September 2019 preliminary outturns: - Primary surplus: CVE 2.5 billion (much higher than projected). - Total revenue: CVE 37.8 billion (below projection CVE 41.6 billion) — shortfalls in grants, taxes on international trade, and nontax revenue. - Expenditures: CVE 39.2 billion (below projection CVE 45 billion) — mainly due to slow execution of capital outlays from procurement bottlenecks. - Overall fiscal deficit: better than projected. - Net other liabilities: below projections due to lower onlending disbursements to SOEs, repayment of CVE 1.4 billion by ASA, and lower capitalization execution. - Financing needs: CVE 3 billion at end-September (well below projections). - Revised 2019 outlook (including preliminary end-November data): - Both revenues and expenditures expected below target. - Programmed primary balance of 0.7 percent of GDP is expected to be achieved. - Financing needs projected at 5 percent of GDP (lower than projected 6.5 percent). ### C. Performance Under the Policy Coordination Instrument (PCI) - Overall: Strong implementation; all reform targets and all non-quantitative continuous targets met; all quantitative targets at end-September met except the tax revenue floor, which was missed by a small margin. - Reforms implemented and milestones met: - 2020 draft budget submitted to parliament in October and approved in December 2019, targeting a primary surplus of about 1 percent of GDP. - Financial information on cash flow performance of the six largest SOEs compiled in July 2019. - First quarterly report monitoring six key SOEs against their budgets completed in December 2019. - BCV began publishing minutes of the Monetary Policy Committee meetings (first publication in June 2019; subsequent minutes released within one month of meetings). - Overnight interest rate corridor reduced by 150 basis points in June 2019; corridor now symmetrical with overnight rates linked directly to the policy rate. - Review report on exemptions completed in December 2019 as part of revisions to the tax benefits code. - Quantitative target outcomes at end-September 2019: - Primary balance target: met (mainly because of under-execution of capital expenditure). - Tax revenue floor: missed by a small margin due to lower-than-programmed taxes on international trade. - Net other liabilities: CVE 1.7 billion in September (target CVE 6.3 billion) — ceiling met. - No accumulation of domestic or external payment arrears. - Ceilings on nominal level of new concessional external debt of the central government: met. - Zero limit on new nonconcessional external debt of the central government: observed. - Floor on net international reserves: met with a wide margin. - Non-quantitative continuous targets: all observed (no restrictions on payments and transfers for current international transactions; no multiple currency practices; no inconsistent bilateral payments agreements; no import restrictions for BOP reasons). ### D. Additional 2019 Reform Measures - Privatization and ownership changes: - Privatization of the airline (TACV): sale of 51 percent of State’s shares to a strategic partner in March 2019. - Sale of 10 percent of the remaining shares (of the new airline CVA) in December 2019; 10 percent offered to company staff and Cabo Verdeans living abroad. - SOEs and sector reforms: - Completion of restructuring of housing program managed by IFH. - Concession for inter-island maritime transportation granted to the private sector (51 percent foreign investor, 49 percent domestic investors) in July 2019. - Institutional and legal reforms: - Adoption by the Council of Ministers of draft Central Bank Organic Law (December 2019). - Adoption by parliament of law creating a Sovereign Private Investment Guarantee Fund (June 2019). - Signing and ratification of the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (November 2019). - Activation of the settlement center for tax-related issues (December 2019). - Completion of second phase of the VAT Monitoring Strategy (December 2019). - Introduction of second phase of taxpayers’ registration (December 2019). - Approval of law creating the Council of National Public Finances (November 2019). ### E. Economic Policies and Structural Reforms for 2020–21 (Outlook and Risks) - Medium-term objectives: strengthen revenue collection, improve expenditure management, advance SOE reforms to support fiscal and debt sustainability; improve monetary policy transmission; strengthen the financial system; promote access to finance and improve the business climate to enhance growth. - Growth and inflation projections: - Real GDP growth expected to stabilize at about 5 percent in 2020 and in the medium term. - Continued dynamism expected in tourism and transportation sectors; completion of key infrastructure projects (port in Maio island; cruise ship terminal in Sao Vicente island). - Inflation projected to remain below 2 percent on average, in line with the euro area outlook. - External sector and reserves: - Current account projected to improve further due to strong exports of goods and services (notably tourism) and remittances. - International reserves expected to remain above 5 months of prospective imports of goods and services in 2020 and in the medium term. - Risks: - Downside: weaker-than-projected global conditions (especially euro area), potential increase in energy prices, Brexit-related uncertainty affecting tourism from the UK (accounts for some 25 percent of arrivals), climate change and natural shocks. - Upside: better-than-projected tourism performance, larger-than-anticipated foreign direct investment. - Government commitment: sustain fiscal consolidation and structural reforms; take corrective actions if downside risks materialize. ### F. Fiscal Policy and Debt Sustainability (Medium-Term Framework) - Primary surplus trajectory: projected increase from 0.7 percent of GDP in 2019 to 1.3 percent of GDP by 2024. - Revenue and expenditure projections (2021–24): - Tax and nontax revenues projected in the range of 28–29 percent of GDP during 2021–24. - Total expenditures projected to decline from 32.4 percent of GDP in 2021 to about 30 percent of GDP in 2024. - Social spending preserved at around 7 percent of GDP and capital spending around 4 percent of GDP during the projection period. - Financing needs and public debt: - Financing needs projected to decline from 5 percent of GDP in 2019 to 0.7 percent of GDP in 2024 (taking into account SOE reforms on onlending and capitalization). - Public debt projected to decline from about 123 percent of GDP in 2019 to 91.9 percent of GDP at end-2024. - Fiscal reform priorities: modernize the tax system and administration, broaden the tax base, improve compliance, and enhance expenditure management (particularly capital expenditure). ### G. The 2020 Budget and Revenue Projections - 2020 budget targets: - Primary surplus target: CVE 2.1 billion (equivalent to 1 percent of GDP). - Aim: contain financing needs and bring public debt-to-GDP below 120 percent in 2020. - 2020 fiscal aggregates and assumptions: - Tax and nontax revenues projected at CVE 62.5 billion (29.7 percent of GDP). - Grants projected at about CVE 6 billion (2.8 percent of GDP). - Expenditures budgeted at 34.2 percent of GDP. - Budgeted total revenue: CVE 68.4 billion (32.5 percent of GDP) — an increase of over 10 percent compared with 2019 estimates. - Tax revenue: CVE 48.1 billion (increase of over 14 percent compared with 2019) — driven by tax on goods and services and tax on income and profits (together close to 80 percent of tax revenue), and compensation of cross-liabilities estimated at CVE 1.7 billion. - Non-tax revenue: CVE 14.4 billion — includes expected privatization/concessions receipts of CVE 4.6 billion and higher revenue from sale of goods and services of CVE 8.3 billion (reflecting impact of fees introduced in 2019 and other nontax measures). - Budgetary grants: CVE 5.9 billion — comprising CVE 1.8 billion budget support; CVE 212 million food aid; and other grants including project-related grants of CVE 3.9 billion. The CVE 3.9 billion includes CVE 3.5 billion from the Netherlands’ contribution to the cruise ship terminal construction project, the European Union’s support for the competitiveness program, and Luxemburg’s support for internship and training programs for employability and for the water and sanitation sector program. *Source: Appendix I. Program Statement (Praia, February 20, 2020).* ### 21. The expected strong economic growth and sustained implementation of reform ### 21. The expected strong economic growth and sustained implementation of reform ### Revenue mobilization - Projected economic expansion of 5 percent in 2020 will support collection of tax and nontax revenue. - Full year effect of 2019 tax measures: - Increase in the corporate income tax rate for offshore banks. - Increases in excises on tobacco, sugarcane rum, soft drinks and juices. - Introduction of specific tax on packs of cigarettes. - New measures planned for 2020: - Improved digitalization of the tax administration for collection, inspection and audit. - Enhanced penalty framework and deterrent measures. - Reduction of informal activities notably through the introduction of incentives for the use of electronic payment systems. - Strengthening of administrative and decision-making capacity in tax administration. - Refocusing on management of financial and nonfinancial assets. - Enhancing of post-customs clearance controls. - Streamline exemptions on value-added tax, on import duties and on excises (Specific actions based on the report adopted by the Council of Ministers in late 2019). - Continued strengthening of tax arrears collection. ### Expenditure composition and projections - Total expenditure amounts to CVE 72 billion (34.2 percent of GDP). - Current spending amounts to CVE 62.4 billion; mandatory expenditures account for about 81 percent covering wages and salaries, and common charges (interests on public debt, transfers to municipalities, social security charges for civil servants, pensions and tax refunds). - Wages and salaries: - Projected at CVE 24 billion (11.4 percent of GDP). - Budgeted increase reflects full year impact of 2019 measures in education, judicial and health sectors (reclassification, recruitment, and promotion), new recruitments, phasing-in and revision of special statutes (Army and Police), promotions and advancement (Police and Health sector), and expenditures covered with revenue from court fees. - Spending for goods and services: - Projected at CVE 13.4 billion (6.4 percent of GDP). - Increase driven by: - Offsetting of accounts related to cross-debt compensation with some companies, including public enterprises (CVE 1.6 billion) — one-off item also reflected in revenues. - Cost of local elections scheduled for 2020 (CVE 160 million). - Broadening of fiscal coverage to other relevant public institutions (hospitals, universities, the judiciary, and security agencies). - Counterpart funding of externally-financed investment (CVE 800 million). - Purchase of medical equipment (CVE 272 million). - Interests on public debt: - Budgeted at CVE 5.7 billion; a moderate increase compared with 2019. - External debt contracted on highly concessional terms; interests on domestic debt represent about 59 percent of total charges on public debt. - Other non-interest current expenditures budgeted at CVE 19.3 billion covering subsidies, current transfers, social benefits and other expenses. ### Fiscal outcome and financing needs (2020) - Primary surplus budgeted to increase from CVE 1.3 billion in 2019 to CVE 2.1 billion in 2020 (1 percent of GDP). - Overall balance budgeted to narrow from CVE 3.7 billion (1.9 percent of GDP) to CVE 3.6 billion (1.7 percent of GDP). - Projected decline in other liabilities (net) from CVE 6.2 billion in 2019 to CVE 4.7 billion mostly because of a decline in capitalization, consistent with progress in public enterprises reforms. - Financing needs decline from CVE 9.9 billion in 2019 (5 percent of GDP) to CVE 8.3 billion in 2020 (3.9 percent of GDP). - Financing composition for 2020: - Net external financing totaling CVE 7.5 billion, mainly from the World Bank and the African Development Bank. - Net domestic financing amounting to CVE 797 million from issuance of government securities. ### Budget execution and cash management - Budget execution will be carefully monitored to safeguard programmed objectives. - Guided by careful cash flow management to prevent accumulation of domestic and external payment arrears or unplanned debt accumulation. - PAYLOG system will be used to ensure suppliers are paid within a maximum period of 45 days. - If midyear budget execution outturn points to a shortfall in budgetary resources, expenditure commitments will be curtailed in line with Cabo Verde law. ### Public debt management - Capacity development will be pursued with development partners through training and technical assistance. - Borrowing policy will adhere to the zero limit on non-concessional external loans under the PCI program. - Projected external borrowing for 2020 mostly covers infrastructure projects and budget financing. ### Sovereign Private Investment Guarantee Fund (SPIGF) and Trust Fund operations - Government decided to create a fund to guarantee private investment using resources from the offshore Trust Fund (TF) set up in 1998 (TF totaling some 106 million euros at end-December 2019). - Background: - TF set up as counterpart to twenty-year bonds (TCMF) expected to be amortized through 2018. - At end of 20-year period, decision taken to close TF and use resources to create the SPIGF and an Emergency Fund for climate-related shocks. - Parliament approved law in late 2018 to replace TCMFs by new bonds amortized in 20 years remunerated at up to 3 percent interest. - In June 2019, Parliament approved law creating the SPGIF; effective in early August 2019 after promulgation. - As of end-December 2019, the TCMFs were held by the BCV and the Pension Fund (INPS). - SPIGF objectives and parameters: - Facilitate access to finance for the private sector to support capital-intensive investments and access to international capital markets. - Fund not operational yet; upon operationalization, initial financing capacity estimated at no more than 5 percent of GDP. - Strategy Note to address asset and liability issues of resources saved in the Trust Fund (new Reform Target): - To be completed by end-April 2020 and before operationalization of the SPIGF, with IMF staff support. - Will cover: - Treatment of TCMFs, notably issuance of replacement bonds and repayment modalities. - Statistical recording of assets and liabilities in public finance statistics. - Key components of legal framework governing SPIGF to align with international best practice, clarifying: (i) governance arrangements; (ii) asset management principles and selection criteria for guaranteed projects; (iii) accumulation and withdrawal rules; (iv) transparency and accountability mechanisms; (v) revenues expected from the SPIGF and projected costs of its liabilities; (vi) risks to the SPIGF net earnings position; and (vii) mechanisms to ensure the fund is not loss-making. ### Monetary policy - Monetary policy geared toward supporting price stability and protecting the peg to the euro. - BCV considers current monetary policy stance appropriate given government fiscal consolidation, low inflationary pressures, adequate level of reserves, and low interest rates in the euro area. - BCV intends to maintain the Monetary Policy Rate unchanged at 1.5 percent. - BCV stands ready to act if macroeconomic conditions change domestically or in the euro area. - Reserve policy: - Strive to build precautionary reserves and meet the reserve accumulation target under the PCI. - Reserve target set to cover about 30 percent of broad money. - Liquidity management and transmission improvements in 2020: - Continue reduction in the overnight interest rate corridor. - Issue Monetary Regularization Securities (TRM) through fixed rate tenders instead of variable rate tenders. - Timely release of minutes of the Monetary Policy Committee meetings to enhance communication (Continuous reform target). - Strengthen near and medium-term forecasting capacity and monetary policy analysis; finalize composite index of economic activity and the framework for medium-term projections. - BCV recapitalization: - Recapitalization to help cover losses through end-2018 partly due to revaluation of assets denominated in US dollars. - 2019 tranche (CVE 700 million) released in late December; 2020 budget allocated CVE 300 million; last tranche reflected in MTFF for 2021-24. ### Financial sector conditions and reforms - Financial system: stable and adequately capitalized; banks profitable; asset quality relatively weak; system over-liquid. - At end-September 2019, most prudential norms met; banks’ profitability improved. - Nonperforming loans (NPLs) remain high at 12.1 percent of total loans (12.2 percent of total loans at end-2018). - BCV will continue to work with banks to address NPLs, particularly legacy loans from defaulted real estate project financing in the tourism sector; legacy NPLs represent the largest portion of NPLs. - Over-liquidity driven by high emigrants’ and INPS deposits in an environment of low credit growth. - Financial sector reform measures to be implemented: - Implementation the recommendations from the 2013 and 2015 asset quality review. - Revamping of the public credit registry and information system by end-December 2020 (Reform Target) — completion of procurement and development of relevant software system. - Creation of a functional central registry of mobile collateral by end-December 2020 (Reform Target). - Strengthening of banks’ lending standards and risk management practices through enhanced supervision. - Development of a centralized official balance sheets database for the corporate sector to support risk-based supervision; BCV to work with the National Statistics Institute (INE) to design financial indicators relevant for risk assessment. - Improvement of the AML/CFT framework in line with FATF requirements to limit loss of correspondent banking relationships; establishment of a national commission as recommended by the National Plan for Evaluation of AML/CFT Risk (December 2020); continued negotiations to secure new correspondent banks. - Ensure proper functioning of the Financial Stability Committee: appointment of participants, establishment of operating regulation, and quarterly meetings. - Ensure functioning of the National Commission for the development of the financial system: appointment of members, periodic meetings, definition of operating regulations, adoption by the Council of Ministers of the Action Plan for the development of the financial system; Commission expected to prepare the Action Plan (June 2020). - Implement main recommendations of the report on access to financing for SMEs (February 2015): strengthen public credit information systems, continued training to increase staffing and capacity of banking supervision department, strengthen BCV’s capacity by hiring additional staff with relevant expertise. - Implement measures specified by the EU to keep the country off the gray list, including: becoming a member of the Global Forum and/or obtaining a satisfactory rating; putting in place a network of agreements covering all EU member states; amending or abolishing harmful tax regimes; becoming member of the Inclusive Framework or implementing the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) minimum standard. - Implement recommendations from the EU assessment in the Global Action on Cybercrime Extended about combatting cybercrimes. ### Public enterprises (SOEs) reforms - SOE reforms remain a key government priority to reduce State role in productive activities and strengthen SOE financial positions to reduce fiscal risks. - Planned 2020 actions: - Sale of remaining State’s shares (39 percent) in CVA (First quarter). - Privatizations: INPHARMA (June 2020); EMPROFAC (June 2020); ELECTRA (December 2020); CV Handling (June 2020). - Licensing of port services through concession (ENAPOR, May 2020); establishment of a concession arrangement for airport services (ASA, June 2020). - Complete a report on liabilities of privatized SOEs outlining implications for the government budget. - Prepare quarterly reports on six key SOEs analyzing financial performance versus approved budgets (Continuous reform target). ### Other structural reforms to support private sector development - Continue broader reform agenda under the PEDS with priority on creating a business-friendly environment to support private sector development, attract FDI, and create jobs. - Planned actions for 2020: - Facilitate access to finance through risk-sharing with the private sector; the 2019 financial ecosystem will become fully operational with three institutions supporting SMEs via: (i) guarantees (Pro Garante, with World Bank support); (ii) venture capital (Pro Capita with commercial banks’ participation); and (iii) capacity development (Pro Empressa). - Publication of the agenda for improving the business climate. - Adoption of the agenda for promoting medium and small-sized enterprises and diversifying the economy. - Expedite procedures for setting up businesses, particularly digital entry and indexing in the Commercial Register. ### Program monitoring and reviews - Progress monitored through quantitative targets and standard non-quantitative continuous targets presented in Table 1, and reform targets in Table 2; quantitative targets defined in the Technical Memorandum of Understanding attached to the Program Statement. - Program review schedule: - Second review of the program to be completed by the IMF Executive Board no later than September 2, 2020. - Third and final PCI review no later than January 15, 2021. *Source: 1cpvea2020001 - 21. The expected strong economic growth and sustained implementation of reform (PDF).* ### 1. This memorandum sets out the understandings between the Cabo Verdean authorities ### 1. This memorandum sets out the understandings between the Cabo Verdean authorities ### QUANTITATIVE AND CONTINUOUS TARGETS — A. Floor on the Primary Balance of the Central Government - Coverage: - Central government includes all units of budgetary central government; excludes local government (municipalities), extra-budgetary units, social security funds and public corporations. - Definition: - Central government primary balance = total tax and non-tax revenues and grants minus primary expenditure; covers non-interest government activities as specified in the budget. - Measured as cumulative flow over the calendar year. - Recording rules: - Revenues are recorded when the funds are transferred to a government revenue account. Tax revenues recorded net of tax refunds. - Central government primary expenditure recorded on a cash basis; covers recurrent expenditures and capital expenditure. - Adjustments: - The floor of primary balance will be adjusted upward adjusted upward (downward) by the surplus (shortfall) in disbursements of grants relative to the baseline projection. - Reporting: - Data provided monthly by the Directorate National of Planning (DNP) of Ministry of Finance with a lag of no more than six weeks from the end of-period. ### QUANTITATIVE AND CONTINUOUS TARGETS — B. Cumulative Floor on Central Government Tax Revenue - Definition: - Tax revenues refer to revenues from tax collection; excludes revenues from asset sales, grants, and non-tax revenues. - Target: - Floor on central government tax revenues calculated as the cumulative flow from the beginning of the calendar year. - Reporting: - Data provided monthly by the DNP with a lag of no more than six weeks from the end of-period. ### QUANTITATIVE AND CONTINUOUS TARGETS — C. Ceiling on Net Other Liabilities - Definition: - Net Other Liabilities = sum of central government deposits, loans to state-owned enterprises (SOEs) and municipalities (onlending), capitalization, and other assets. - Deposits: all claims represented by evidence of deposit on deposit-taking corporations (including the central bank). - Onlending: domestic and external loans contracted by the central government and onlending proceeds to SOEs. Net onlending = disbursement of these loans minus repayment of previous loans by SOEs to the central government. - Capitalization: capital injection or equity participation by the central government into corporations. - Other assets: other accounts receivable/payable such as trade credit and advances and miscellaneous other items due to be paid or received. - Measurement: - Ceiling measured as cumulative over the calendar year. - Reporting: - Data provided monthly by the DNP of Ministry of Finance with a lag of no more than six weeks from the end of-period. ### QUANTITATIVE AND CONTINUOUS TARGETS — D. Non-accumulation of Domestic Payments Arrears - Commitment: - Government will not accumulate any new domestic payments arrears; monitored through monthly execution of the cash-flow plan and release of budget appropriations. - Definition of arrears: - Domestic payment obligation to suppliers deemed in arrears if not paid within the normal grace period of 60 days (30 days for government salaries and debt service) or such other period specified by the budget law or contractually agreed after verified delivery, unless timing/amount is subject to good faith negotiations. - Reporting: - DNP will submit quarterly a detailed table of the stock of domestic payments arrears, including accumulation, payment, rescheduling and write-off during the quarter. - Data provided within six weeks after the end of the quarter. ### QUANTITATIVE AND CONTINUOUS TARGETS — E. Ceiling on Nominal Level of New Concessional External Debt of the Central Government - Coverage: - External public debt = debt to nonresidents contracted or guaranteed by the central government; comprises external debt of central government and external debt of official sector entities and SOEs guaranteed by the central government. - Definition of debt: - As per Point 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements: current liability created under contractual arrangement requiring future payments in assets or services. Forms include: - (i) Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits), temporary exchanges of assets equivalent to fully collateralized loans (repurchase agreements, official swap arrangements). - (ii) Suppliers’ credits permitting deferred payments after delivery. - (iii) Leases: debt is present value (at lease inception) of all lease payments expected during the agreement excluding payments covering operation, repair, or maintenance. - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - Concessionality: - Debt is concessional if grant element ≥ 35 percent. - Grant element = (nominal value − present value) / nominal value expressed as percentage of nominal value. - PV of debt at contracting = discounting future debt-service payments using unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). - For debts with grant element equal or below zero, PV set equal to nominal value of the debt. - Debt rescheduling and debt reorganization excluded from limits. New concessional external debt excludes normal short-term (less than one year) import-related financing. - Reporting: - Government will consult Fund staff before assuming liabilities of uncertain classification. - Details of all new external debt (including government guarantees), indicating terms and creditors, provided quarterly within six weeks of end of each quarter. ### QUANTITATIVE AND CONTINUOUS TARGETS — F. Non-concessional External Debt Contracted or Guaranteed by the Central Government - Target: - Ceilings on medium- and long-term, and on short-term, non-concessional external debt constitute quantitative targets; zero ceiling on non-concessional external debt is continuous. - Concessionality definition: - Debt is non-concessional if grant element < 35 percent; grant element and PV calculated as in section E using unified discount rate of 5 percent. - For debts with grant element equal or below zero, PV set equal to nominal value. - Debt rescheduling and debt reorganization excluded from limits. - Quantitative target excludes borrowing from the Fund. Non-concessional external debt excludes normal short-term (less than one year) import-related financing. - The Portuguese government’s precautionary credit line (the “Portuguese credit line”) in support of the exchange rate peg is excluded from definition of non-concessional external debt. - Reporting: - Government will consult Fund staff before assuming uncertain liabilities. - Details of all new external debt (including government guarantees), indicating terms and creditors, provided quarterly within six weeks of end of each quarter. ### QUANTITATIVE AND CONTINUOUS TARGETS — G. Net International Reserves of the Central Bank - Target: - Floor on stock of net international reserves (NIR) of the BCV constitutes a quantitative target. - Definition: - NIR = gross international reserves of the BCV net of its short-term external reserve liabilities, calculated at current exchange rates. - Gross reserves include gold, holdings of SDRs, reserve position at the IMF, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. - Short-term external liabilities = liabilities to nonresidents contracted by the BCV with original maturity < 1 year, any net off-balance-sheet position (futures, forwards, swaps, or options) with residents and nonresidents, any arrears on principal and interest to external creditors and suppliers, and purchases from the IMF. - Adjustments to NIR floor (downward): - The cumulative upward deviations in external debt service relative to program assumptions. - The cumulative downward deviations in external financial assistance, and project and budget loans relative to program assumptions. - For adjusters, these flows valued at current exchange rates. - Reporting: - BCV to transmit a table on the NIR monthly with a maximum delay of four weeks. ### QUANTITATIVE AND CONTINUOUS TARGETS — H. Non-accumulation of External Payments Arrears - Commitment: - Government will not accumulate any new external payments arrears; continuous target. - Monitored through monthly execution of cash-flow plan and release of budget appropriations. - Definition of external arrears: - Amount of external debt service due and not paid within the contractually agreed period, subject to any applicable grace period, including contractual and late interests. - Arrears resulting from nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded. - Reporting: - Data on (i) debt-service payments; and (ii) external arrears accumulation and payments transmitted quarterly by the DNP within six weeks of end of each quarter. - Government will inform Fund staff immediately of any accumulation of external arrears. ### MEMORANDUM ITEM — I. Floor on Central Government Social Spending - Coverage: - Indicative floor applies only to expenditures incurred by the central government on plans and programs intended to have positive impact on education, health, and social protection, excluding wages and salaries component. - Measurement and reporting: - Data measured as cumulative over the fiscal year. - Reported by the DNP on a quarterly basis with a lag of no more than six weeks from the end-of-period. ### OTHER DATA REQUIREMENTS - Trade and balance of payments: - Data on exports and imports, including volume and prices compiled by the Director of Customs and the BCV, transmitted quarterly within five weeks after the end of each quarter. - Preliminary quarterly balance of payments, compiled by the BCV, forwarded within six weeks after the end of each quarter. - SOE and other entities: - Statement of Other Economic Flows as defined in the IMF Manual GFSM2001 or GFSM2014 relative to holding gains/losses of the previous year with ASA, Electra, EMPROFAC, ENAPOR, and IFH transmitted annually within three months after the end of the following year (15 months after the closing date). - Consolidated balance sheet of ASA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year transmitted annually within three months after the end of the following year (15 months after the closing date). ### SUPPLEMENTARY INFORMATION — COVID-19: POTENTIAL IMPACT, PREPAREDNESS MEASURES, AND IMPLICATIONS - Context: - So far, there have been no reported cases of COVID-19 in Cabo Verde. - Cabo Verde is a small tourism-dependent island economy; tourism activities estimated to account for about 25 percent of GDP and some 50 percent of export receipts. - Largest share of tourists arrive from the United Kingdom and the euro area. - Expected impact: - Tourism: Operators estimated a decline close to 60 percent in arrivals in 2020 if current situation persists through end-September, which would trigger a decline in tourism receipts of the same order of magnitude. - Transport sector: Activities in transport together with communications account for over 15 percent of GDP; expected to contract significantly due to travel restrictions and impact on tourism and Cabo Verde Airlines (CVA). CVA currently almost grounded; travel restrictions will have a significant impact on CVA’s financial situation. - Imports: Decline in commodity prices, notably for petroleum products, could lower imports; capital and intermediate goods account for some 30 percent of total imports. Positive impact of lower import demand on trade balance likely more than compensated by deterioration in services balance from decline in tourism receipts. - Remittances: Economic slowdown and uncertainties in the United States and Europe may adversely impact remittances; past experience shows remittances can increase after exogenous shocks, but common COVID-19 shock may make such an increase challenging. - Preparedness and response measures taken by authorities: - No confirmed cases reported to date. - Preventive measures: installation of body temperature scans in airports; suspension of official travel and flights to China and other heavily affected countries; preparation of quarantine areas in hospitals. - Contingency preparations: contingency plan, rapid response team, and activated emergency plan with initial funding of CVE 76 million (0.04 percent of GDP) by reallocating budgetary appropriations to cover additional expenses for personnel, training and medical equipment. - On March 17, authorities introduced further travel restrictions, including suspension of flights from European countries affected by COVID-19, the United States, Brazil, Senegal and Nigeria, as well as maritime traffic; with a few exceptions. *This memorandum sets out the understandings between the Cabo Verdean authorities and the IMF staff regarding definitions of variables included in the quantitative targets and continuous targets, key assumptions, and reporting requirements for the 18 months Policy Coordination Instrument (PCI).* ### 3. While external buffers provide a first line of defense, the possible size of the ### 1cpvea2020001 - 3. While external buffers provide a first line of defense, the possible size of the ### COVID-19 shock and fiscal/external implications - Authorities’ preliminary estimate: real GDP contraction of 4 percent in 2020. - Likely fall in revenue leaves little fiscal space despite readiness to reprioritize spending. - Authorities seeking additional financial support, advocating for grants to cover additional financing needs, consistent with resolve to reduce the debt-to-GDP ratio below 100 percent over the medium term. - Engagement with development partners ongoing; expressed interest in potential emergency financial support from the World Bank and the IMF. - Planning meetings with private sector representatives to discuss expected impact of COVID-19 and potential contributions from the sector. - Authorities assessing likely net effect of the Covid-19 pandemic on the balance of payments and international reserves. - External accounts implications: reduction in tourism revenues and remittances likely, partially offset by lower imports including energy imports due to the recent collapse in oil prices. - Staff position: not proposing an adjustment to program targets at this juncture; working with authorities on a revised macroeconomic baseline, potential implications for quantitative targets under the program as well as additional financing. - COVID-19 implications described as "constantly evolving," making formulation of a credible new macroeconomic baseline difficult. - Authorities to continue coordination with Cabo Verde’s development partners, especially the World Bank. ### Recent economic developments (pre-COVID-19 data and context) - GDP growth: 6.1 percent in real terms in the first three quarters of 2019 (last available national accounts data), compared to the same period of 2018; expansion was the fastest since 2008. - Sectoral expansion: broad-based across tourism, commerce, manufacturing, public utilities, construction, and transportation; primary sector affected by adverse weather for the third year in a row. - Current account deficit: declined from 7.9 percent of GDP in 2017 to a preliminary estimate of 0.2 percent of GDP in 2019. - International reserves: rose to €661 million in end-2019, an increase of + €133 million compared to the previous year. - Inflation: average inflation was 1.1 percent in 2019; underlying inflation (excluding energy and non-processed food) stood at 1.5 percent in the 12-month period to February 2020. - Monetary policy: no changes in stance since approval of the PCI; Central Bank of Cabo Verde (BCV) adopted the two monetary reform targets agreed under the program even before its start. - Banking sector: recovered profitability; capitalization strengthened; system remains highly liquid with substantial deposits by non-residents; legacy non-performing loans remain relatively high. - Public debt: preliminary data for end-2019 indicate a debt-to-GDP ratio around 122.5 percent, down from a peak of 128.4 percent in 2016; public external debt described as long maturity and concessional, rendering debt service clearly manageable. - SOE reforms: sale of 51 percent stake in national airline concluded in March 2019; additional 10 percent sold to employees and diaspora investors; concessions and operational efficiency measures underway. ### Performance under the PCI program - General assessment: performance under the PCI program described as "very strong." - Reform targets: authorities met all reform targets for the first review and all continuous and quantitative targets for end-September 2019 (test date) except for the floor on tax revenues, missed by a small margin. - Primary balance: floor met by a substantial margin for the test date; preliminary data indicate the primary surplus goal of 0.7 percent of GDP was met for the year as a whole. - Tax revenue floor: not met due to lower-than-expected import tax collection and other temporary and seasonal factors; authorities adjusted budget execution to actual revenues to maintain fiscal anchor. - Net international reserves: floor met with a very wide margin; accumulation above the quantitative target for September 2019 by around €120 million (more than 20 percent of reserves). - 2020 budget (approved by Parliament in December 2019): in line with program objectives, targeting a primary surplus of around 1 percent of GDP (reform target); expected revisions due to Covid-19 including increases in health spending and significant drop in tax revenues. - Authorities’ fiscal rule: will continue to adjust spending authorizations to actual revenues, in accordance with Cabo Verde’s budget legislation. - SOE reporting: financial information on cash flow performance of the six largest SOEs completed in July; regular quarterly reporting done in December as expected. ### Structural reforms agenda and FSGIP (Private Investment Guarantee Fund) - Policy objective: authorities believe a dynamic private sector is fundamental to increase growth and create jobs; committed to improving business environment, better access to financing, reduction in bureaucratic obstacles, and privatizations. - Identified obstacle: difficult access to financing cited as one of main obstacles to growth. - FSGIP: law creating a Private Investment Guarantee Fund (FSGIP) approved by Parliament in June 2019 (before start of PCI); funded with resources held in an offshore Trust Fund established in 1998 at Banco de Portugal. - Origins of Trust Fund: part of measures adopted in 1998 to strengthen macroeconomic stability, partially supported by a precautionary Stand-by Arrangement with the IMF; package included the peg to the then Portuguese escudo (later the euro) and a short-term credit line from Portugal that remains in place. - Staff involvement: IMF staff actively contributed to design and operational framework of FSGIP, including visits in September and December 2019 and discussions during annual meetings in Washington D.C.; FSGIP strategy note included as a new reform target. - Fiscal treatment: FSGIP will not affect gross public debt; bonds in the domestic market (TCMF) backed by Trust Fund assets are being replaced by new bonds issued by the FSGIP, an independent entity outside the public sector perimeter and registered offshore. - Operational principles: FSGIP will strictly follow best practices in selecting projects. - Estimated lending capacity: when fully operational, FSGIP lending capacity estimated at around 5.8 percent of GDP. - Emergency Fund: authorities established a €10 million Emergency Fund with part of the Trust Fund resources to support population affected by climate-related events and natural disasters. - Authorities’ interest: appreciate IMF work on incorporating natural disasters and climate change into macroeconomic framework; committed to increase structural, financial, and post-disaster resilience; welcome engagement with IMF and World Bank staff on a comprehensive Climate Change Policy Assessment (CCPA). ### Conclusion and authorities’ stance - Authorities view the PCI as an important instrument to support strong policy framework, structural reforms, and to catalyze external financing from bilateral and multilateral partners. - In face of drastically changing global environment due to Covid-19 pandemic, authorities reaffirm commitment to sound economic policies. - Authorities expect possible changes in the PCI program given fluid global outlook and trust Fund staff will remain engaged, flexible, and constructive. *Statement by Afonso Bevilaqua, Executive Director for Cabo Verde, and Pedro Fachada, Alternate Executive Director — March 23, 2020* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1cpvea2020001.pdf_