## 1cpvea2020002

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### Executive summary — context, request, and staff assessment
- Context prior to COVID-19
  - Real GDP growth in 2019: 5.7 percent.
  - Inflation at end-February 2020: 1.9 percent.
  - Gross international reserves topped €666 million (8 months of prospective imports of goods and services).
  - Revenue performance: 5 percent increase y/y.
  - Non-performing loans: 12 percent of total loans (legacy loans related to real estate projects in 2006-08).
  - Exchange rate regime: conventional fixed peg to the euro at CVE 110.265 per euro since 1999.
  - Pre-COVID medium-term expectations: real GDP expanding by 5 percent, inflation below 2 percent, external current account deficit below 4 percent of GDP, international reserves above 5 months of prospective imports.
- Authorities’ request
  - Request financial assistance under the Rapid Credit Facility (RCF) totaling SDR 23.7 million (100 percent of quota).
  - Request includes that resources be disbursed as direct budget support.
- IMF staff views
  - Assessment: Cabo Verde qualifies for access under the RCF; public debt is sustainable and capacity to repay the Fund is adequate.
  - Role of RCF resources:
    - Will help cover about 15 percent of the estimated balance of payments (BOP) financing needs.
    - Expected to play an important catalytic role for financing from other development partners.
    - Staff supports disbursement as direct budget support given projected large fiscal financing needs.

### COVID-19 impact — epidemiology, channels, macro and fiscal projections
- Epidemiological status (as reported by mid-April / April 20 figures)
  - By mid-April: 55 confirmed cases; geographic breakdown includes Praia, Boa Vista (51 cases, 1 death), and São Vicente.
  - As of April 20: one fatality (a British tourist in Boa Vista) and a total of 67 cases, mostly in Boa Vista.
- Main channels of impact
  - Global economic downturn, travel restrictions, domestic mitigation measures (countrywide lockdown on non-essential activities, restrictions on inter-island travel).
- Key macroeconomic projections and changes for 2020 (authorities’ and staff estimates)
  - Real GDP: projected to contract by 5.5 percent in 2020 (compared with a 5 percent increase under the PCI); authorities’ baseline cited a possible decline to -5.8 percent.
  - External position: current account deficit projected to widen to 14.7 percent of GDP (mainly due to decline in tourism export receipts).
  - Reserves: forecast to decline by €123 million (compared with an accumulation of €45 million anticipated under the PCI macroeconomic framework).
  - Fiscal: primary balance projected to reach a deficit of 5.8 percent of GDP (compared with a surplus of 1 percent of GDP under the PCI) as revenues drop by 6.3 percentage points of GDP.
  - Financing needs: estimated at 11.3 percent of GDP (compared with 3.9 percent of GDP under the PCI baseline).
  - Health and social protection measures: 1.2 percent of GDP (estimated CVE 2.2 billion).
  - Tourism shock: tourism operators estimate tourist arrivals would decline by more than 60 percent if the current situation persists until end-September; authorities estimate a decline in tourist arrivals of about 60 percent compared to 2019.
  - Immediate fiscal needs (authorities’ estimate): at least 10 percent of GDP (about US$192 million).
- Social impact
  - Households’ incomes adversely affected; higher unemployment risk for seasonal hotel and tourism workers; impacts on informal sector operators.

### Government and central bank policy response
- Public health and containment measures
  - Body temperature scanners in airports; suspension of official travel and flights to high-risk countries; quarantine areas in hospitals.
  - Mid-March: suspension of flights from affected countries and maritime traffic.
  - Late March: border closures, lockdown on non-essential activities, restrictions on inter-island travel; national state of emergency declared and extended (until May 2 for the three most affected islands and April 26 for the remaining islands).
  - National Contingency Plan and activation of emergency plan; initial funding of CVE 76 million (0.04 percent of GDP) from reallocations; Plan being revised upward with expected external financing and donations.
- Support to the corporate sector
  - Loan guarantees amounting to some CVE 4 billion (about US$40 million); authorities’ commitment to provide loan guarantees amounting to US$30 million (statement in Letter of Intent).
  - Temporary tax relief and flexible payment schedules for value-added and other withholding taxes; deferral of certain tax payments up to the end of the year.
  - Accelerated settlement of government invoices.
  - Cancellation of contributions to the pension fund for three months.
  - Eligibility for relief requires demonstration of quarterly revenue loss of 30 percent.
- Social protection measures
  - Estimated at CVE 2.2 billion (1.2 percent of GDP), including income compensation for informal sector operators, social inclusion emergency measures, World Bank-supported social inclusion income, support to microfinance institutions for interest-free loans, and care for the elderly with food assistance.
  - Measures are temporary and to be implemented with municipal support.
- Fiscal adjustments and budget timetable
  - Cuts to travel, training, recruitment, office supplies, promotions in the civil service.
  - Reduction of capital spending for new domestically-financed projects not yet started.
  - Authorities plan to revise the 2020 budget to reflect COVID-19 priorities; revised budget expected to be introduced in parliament in June.
  - Planned coverage of financing needs with loans and grants from development partners, RCF resources, and issuance of government securities not exceeding 3 percent of GDP as required under the law.
- Monetary and financial measures (Banco de Cabo Verde — BCV)
  - Policy rate reduced by 125 basis points to 0.25 percent.
  - Minimum reserve requirements reduced from 13 to 10 percent.
  - Overnight deposit rate reduced by 5 basis points to 0.05 percent.
  - Establishment of a long-term lending instrument for banks (repayment period of three years as noted in Letter of Intent).
  - BCV called on banks to grant delayed payment of loans without implications on NPLs; authorities clarified moratorium available to households and companies in good standing with their loan payment record at end-March 2020.
  - Staff cautioned about risks given high NPLs and recommended enhanced NPL reporting and monitoring mechanisms, and measures to ensure appropriate targeting of moratoria.
  - Prudential measures include temporary reduction of banks’ capital adequacy ratios until December 2021 (Letter of Intent).

### Modalities under the Rapid Credit Facility (RCF) and financing strategy
- RCF request and role
  - Authorities request disbursement under the RCF equivalent to 100 percent of quota (SDR 23.7 million or about US$32.3 million).
  - RCF resources would cover about 15 percent of the projected BOP financing gap.
  - Requested modality: authorities request that RCF resources be made available as direct budget support to help cover fiscal financing needs and provide BCV with additional foreign exchange.
- Balance of payments and residual financing
  - Current account deficit projected at 14.7 percent of GDP in 2020 (3.9 percent of GDP under the PCI).
  - Overall deficit of €197 million projected (compared with a surplus of €45 million under the PCI).
  - Remaining financing expected from loans and grants from the World Bank, the European Union, and the African Development Bank, which have announced plans to frontload disbursements.
  - Residual financing gap (7.3 percent of GDP) to be covered through a draw-down on international reserves, to a level of €543 million, about €123 million below the end-2019 level.
  - Staff notes that an even faster draw-down on reserves would be undesirable and potentially destabilizing.
- Staff view
  - Impact of COVID-19 shocks on the BOP is expected to be temporary.
  - Staff supports making the RCF disbursement direct budget support.

### Debt sustainability, capacity to repay, safeguards and risks
- Capacity to repay and Fund obligations
  - The country does not have an outstanding debt to the Fund based on existing credit prior to the RCF disbursement.
  - Taking into account the proposed disbursement under the RCF, total obligations to the Fund are projected at:
    - 2.2 percent of exports of goods and services at end-2025.
    - 3.7 percent of international reserves at end-2025.
  - Selected indicators (obligations and outstanding credit; exact series preserved):
    - Total obligations based on existing and prospective credit (Millions of SDRs): 0.0 (2020–2024), 2.4 (2025), 4.7 (2026–2029), 2.4 (2030), 0.0 (2031–2034).
    - Total obligations based on existing and prospective credit (Millions of U.S. dollars): 0.0 (2020–2024), 3.3 (2025), 6.6 (2026–2029), 3.3 (2030), 0.0 (2031–2034).
    - Percent of exports of goods and services (obligations): 0.0 (2020–2024), 0.20 (2025), 0.40 (2026–2029), 0.30 (2030), 0.20 (2031), 0.00 (2032–2034).
    - Percent of gross international reserves (obligations): 0.0 (2020–2024), 0.40 (2025), 0.70 (2026), 0.60 (2027), 0.60 (2028), 0.50 (2029), 0.20 (2030), 0.00 (2031–2034).
    - Outstanding Fund credit (Millions of SDRs): 23.7 (2020–2024), 23.7 (2025), 21.3 (2026), 16.6 (2027), 11.9 (2028), 7.1 (2029), 2.4 (2030), 0.0 (2031–2034).
    - Outstanding Fund credit (Millions of U.S. dollars): 32.5 (2020), 32.6 (2021), 32.8 (2022), 32.9 (2023), 33.0 (2024), 29.7 (2025), 23.1 (2026), 16.5 (2027), 9.9 (2028), 3.3 (2029), 0.0 (2030–2034).
    - Outstanding Fund credit as percent of exports of goods and services: 5.3 (2020), 4.2 (2021), 3.5 (2022), 3.0 (2023), 2.7 (2024), 2.2 (2025), 1.5 (2026), 1.0 (2027), 0.6 (2028), 0.2 (2029), 0.0 (2030–2034).
    - Outstanding Fund credit as percent of gross international reserves: 5.5 (2020), 5.9 (2021), 5.6 (2022), 5.1 (2023), 4.7 (2024), 3.7 (2025), 2.5 (2026), 1.6 (2027), 0.8 (2028), 0.2 (2029), 0.0 (2030–2034).
- Debt sustainability and risk assessment (DSA)
  - Updated DSA shows:
    - Risk of external and total debt distress: High (unchanged compared with the 2019 DSA).
    - Public debt expected to reach 137.4 percent of GDP at end-2020 (124.2 percent of GDP at end-2019).
    - Public debt forecast to resume medium-term declining trend in 2021, reaching 99.4 percent of GDP by 2025.
    - Present value of PPG external debt (percent of GDP): 60.6 (2019), 62.9 (2020), 58.7 (2021), 62.1 (2022), 68.0 (2023), 65.3 (2024), 60.8 (2025), 56.8 (2026), 52.8 (2027), 50.0 (2028).
    - Present value of total debt (percent of GDP, benchmark: 70%): 96.0 (2019), 95.8 (2020), 92.3 (2021), 92.7 (2022), 106.6 (2023), 103.5 (2024), 96.7 (2025), 90.5 (2026), 85.0 (2027), 80.0 (2028).
  - Assessment details and implications
    - Public debt is assessed as sustainable, supported by manageable debt service indicators, even under various stress scenarios.
    - Debt sustainability is subject to considerable downside risks, including from a more severe or prolonged impact of the COVID-19 shock.
    - Graduating to a moderate risk of external debt distress will require post-COVID-19 policies that refocus on:
      - Fiscal consolidation.
      - Growth-enhancing structural reforms, notably in the SOEs sector.
      - Continuous prudent borrowing policies.
- Safeguards and central bank oversight
  - BCV has committed to undergo an updated safeguards assessment; the assessment would be completed before the Executive Board’s approval of any subsequent arrangement.
  - Authorities will provide Fund staff with the central bank’s annual audit report and authorize the external auditors to hold discussions with staff.

### Key fiscal and balance-of-payments figures (selected series preserved exactly)
- Public debt stock (Total nominal government debt, percent of GDP — series as presented)
  - 125.9 (2017), 124.7 (2018), 123.0 (2019), 124.2 (2020), 118.1 (2021), 137.4 (2022), 132.0 (2023), 122.5 (2024), 114.0 (2025), 106.3 (2026), 99.4 (2027 projected by table header sequence).
- External current account (including official transfers, percent of GDP)
  - -7.9 (2017), -5.4 (2018), -3.0 (2019), -0.2 (2020), -3.9 (2021), -14.3 (2022), -8.6 (2023), -4.7 (2024), -2.6 (2025), -1.7 (2026), -0.5 (2027).
- Gross international reserves (months of prospective imports of goods and services)
  - 5.5 (2017), 5.5 (2018), 5.5 (2019), 8.0 (2020), 5.5 (2021), 6.3 (2022), 5.3 (2023), 5.2 (2024), 5.2 (2025), 5.3 (2026), 5.6 (2027).
- Memorandum items (selected)
  - Exports of goods and services (millions of U.S. dollars): 618.5 (2020), 777.5 (2021), 923.6 (2022), 1082.2 (2023), 1234.9 (2024), 1378.4 (2025), 1534.7 (2026), 1662.3 (2027), 1800.7 (2028), 1951.1 (2029), 2114.3 (2030).
  - Debt service (millions of U.S. dollars): 102.8 (2020), 112.0 (2021), 139.0 (2022), 144.2 (2023), 147.5 (2024), 150.1 (2025), 160.0 (2026), 166.6 (2027), 175.2 (2028), 188.0 (2029), 183.1 (2030).
  - Quota (millions of SDRs): 23.7 (all years).
  - Gross international reserves (€ millions, end of period): 594.9 (2020), 549.6 (2021), 580.6 (2022), 639.6 (2023), 701.8 (2024), 811.8 (2025), 907.7 (2026), 1,028.1 (2027), 1,175.5 (2028), 1,346.0 (2029), 1,554.6 (2030).

### Policy implications and commitments
- Immediate priorities
  - Provide targeted health spending and social protection (estimated 1.2 percent of GDP / CVE 2.2 billion).
  - Reorient spending and use external buffers while preserving the public investment program where feasible.
  - Secure timely donor support and frontloaded concessional financing.
- Medium-term commitments
  - Recommit to fiscal consolidation once the crisis subsides, implement growth-enhancing structural reforms (notably in SOEs), and maintain prudent borrowing policies to reduce the risk of debt distress.
  - Undertake tax policy reforms and strengthen revenue administration to reverse the decline in revenue collection.
  - Sign a Memorandum of Understanding between BCV and the Ministry of Finance clarifying roles for timely servicing of IMF obligations; undertake updated safeguards assessment and provide audit access to IMF staff.
- IMF staff recommendation
  - Support for RCF disbursement of SDR 23.7 million (100 percent of quota) as direct budget support to help cover about 15 percent of projected BOP needs and catalyze additional donor financing.

*Source: IMF staff report — EXECUTIVE SUMMARY and Appendix I. Letter of Intent (April 16, 2020).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Recent performance before COVID-19: robust growth, low inflation, improving external and fiscal positions, and reduced fiscal risks through State-Owned Enterprises (SOEs) reforms.
- Pre-pandemic indicators:
  - Inflation at end-February 2020: 1.9 percent.
  - Gross international reserves topped €666 million (8 months of prospective imports of goods and services).
  - Revenue performance: 5 percent increase y/y.
  - Non-performing loans: 12 percent of total loans (legacy loans related to real estate projects in 2006-08).
- Policy frameworks and reforms:
  - Progress under the authorities’ Plan for Sustainable Development (PEDS) and the Policy Coordination Instrument (PCI).
  - Exchange rate regime: conventional fixed peg to the euro at CVE 110.265 per euro since 1999.
- Pre-COVID medium-term expectations: real GDP expanding by 5 percent, inflation below 2 percent, external current account deficit below 4 percent of GDP, international reserves above 5 months of prospective imports.

### Request for Fund Support
- Authorities request financial assistance under the Rapid Credit Facility (RCF) totaling SDR 23.7 million (100 percent of quota).
- Request includes that resources be disbursed as direct budget support.

### Staff’s Views
- Assessment: Cabo Verde qualifies for access under the RCF; public debt is sustainable and capacity to repay the Fund is adequate.
- Role of RCF resources:
  - Will help cover about 15 percent of the estimated balance of payments (BOP) financing needs.
  - Expected to play an important catalytic role for financing from other development partners.
  - Staff supports disbursement as direct budget support given projected large fiscal financing needs.

### Economic Developments Pre-COVID-19
- Recent strengths: sustained revenue mobilization, expenditure restraint, SOE reforms, stable and well-capitalized banking system (notwithstanding 12 percent NPLs).
- Structural reforms: privatization of the airline and concessions for maritime inter-island transport.
- PCI performance: strong; first PCI review completed by the Board on March 30, 2020.

### Impact of the COVID-19 Pandemic
- Epidemiological status (by mid-April): 55 confirmed cases; geographic breakdown includes Praia, Boa Vista (51 cases, 1 death), and São Vicente.
- Main channels of impact: global economic downturn, travel restrictions, domestic mitigation measures (countrywide lockdown on non-essential activities, restrictions on inter-island travel).
- Macroeconomic projections and changes for 2020:
  - Real GDP: projected to contract by 5.5 percent in 2020 (compared with a 5 percent increase under the PCI).
  - External position: current account deficit projected to widen to 14.7 percent of GDP (mainly due to decline in tourism export receipts).
  - Reserves: forecast to decline by €123 million (compared with an accumulation of €45 million anticipated under the PCI macroeconomic framework).
  - Fiscal: primary balance projected to reach a deficit of 5.8 percent of GDP (compared with a surplus of 1 percent of GDP under the PCI) as revenues drop by 6.3 percentage points of GDP.
  - Financing needs: estimated at 11.3 percent of GDP (compared with 3.9 percent of GDP under the PCI baseline).
  - Health and social protection measures: 1.2 percent of GDP.
- Government fiscal adjustments:
  - Cuts to travel, training, recruitment, office supplies, promotions in the civil service.
  - Reduction of capital spending for new domestically-financed projects not yet started.
  - Planned coverage of financing needs with loans and grants from development partners, RCF resources, and issuance of government securities not exceeding 3 percent of GDP as required under the law.
- Downside fiscal risks:
  - Stronger contraction in real GDP or extension of tax moratoriums could reduce revenues further.
  - Potential for higher health and social protection spending.
  - Risk of further downsizing of capital outlays and increased domestic borrowing.
- Social impact:
  - Households’ incomes adversely affected, higher unemployment risk for seasonal hotel and tourism workers, and impacts on informal sector operators.

### Medium-Term Outlook and Risks
- Baseline conditional on global recovery and resumption of tourism and capital flows:
  - Growth projected at 5 percent in 2021.
  - Nominal GDP forecast: CVE 200.4 billion in 2021 and CVE 217.4 billion in 2022 (compared with CVE 224.3 billion and CVE 239.8 billion respectively under the PCI).
  - Inflationary pressures expected to remain low.
  - External current account deficit projected to improve with higher capital inflows aiding reserve build-up.
- Downside risks:
  - Protracted global downturn affecting tourism, remittances and FDI.
  - Domestic risks: local outbreak overwhelming the health system, weak fiscal consolidation, stalled structural reforms, weather-related shocks.
- Upside risks:
  - Global recovery and sustained implementation of reform agenda, including privatization of targeted SOEs in transport and energy.

### Policy Issues and Authorities’ Response
- Prevention and preparedness:
  - Body temperature scanners in airports; suspension of official travel and flights to high-risk countries; quarantine areas in hospitals.
  - Mid-March: suspension of flights from affected countries and maritime traffic.
  - Late March: border closures, lockdown on non-essential activities, restrictions on inter-island travel.
- Healthcare measures:
  - National Contingency Plan and activation of emergency plan; initial funding of CVE 76 million (0.04 percent of GDP) from reallocations; Plan being revised upward with expected external financing and donations.
- Support to the corporate sector:
  - Loan guarantees amounting to some CVE 4 billion (about US$40 million).
  - Temporary tax relief and flexible payment schedules for value-added and other withholding taxes.
  - Accelerated settlement of government invoices.
  - Cancellation of contributions to the pension fund for three months.
  - Eligibility for relief requires demonstration of quarterly revenue loss of 30 percent.
- Social protection measures:
  - Estimated at CVE 2.2 billion (1.2 percent of GDP), including income compensation for informal sector operators, social inclusion emergency measures, World Bank-supported social inclusion income, support to microfinance institutions for interest-free loans, and care for the elderly with food assistance.
  - Measures are temporary and to be implemented with municipal support.
- Fiscal adjustment and budget timetable:
  - Authorities plan to revise the 2020 budget to reflect COVID-19 priorities; revised budget expected to be introduced in parliament in June.
- Monetary and financial measures by the central bank (BCV):
  - Policy rate reduced by 125 basis points to 0.25 percent.
  - Minimum reserve requirements reduced from 13 to 10 percent.
  - Overnight deposit rate reduced by 5 basis points to 0.05 percent.
  - Establishment of a long-term lending instrument for banks.
  - BCV called on banks to grant delayed payment of loans without implications on NPLs and provisioning; staff cautioned about risks given high NPLs and recommended enhanced NPL reporting and monitoring mechanisms, and measures to ensure appropriate targeting of moratoria.
  - Authorities clarified moratorium available to households and companies in good standing with their loan payment record at end-March 2020.

### Modalities Under the Rapid Credit Facility (RCF)
- Balance of payments needs:
  - Current account deficit projected at 14.7 percent of GDP in 2020 (3.9 percent of GDP under the PCI).
  - Overall deficit of €197 million projected (compared with a surplus of €45 million under the PCI).
- RCF request and role:
  - Authorities request disbursement under the RCF equivalent to 100 percent of quota (SDR 23.7 million or about US$32.3 million).
  - RCF resources would cover about 15 percent of the projected BOP financing gap.
  - Remaining financing expected from loans and grants from the World Bank, the European Union, and the African Development Bank, which have announced plans to frontload disbursements.
- Residual shortfall:
  - Residual financing gap (7.3 percent of GDP) to be covered through a draw-down on international reserves, to a level of €543 million, about €123 million below the end-2019 level.
  - Staff notes that an even faster draw-down on reserves would be undesirable and potentially destabilizing.
- Requested modality: authorities request that RCF resources be made available as direct budget support to help cover fiscal financing needs and provide BCV with additional foreign exchange.
- Staff view: impact of COVID-19 shocks on the BOP is expected to be temporary.

*Source: IMF staff report — EXECUTIVE SUMMARY (April 16, 2020).*

### 8.      Cabo Verde’s capacity to repay the Fund is adequate (Table 4). The country does not

### 8.      Cabo Verde’s capacity to repay the Fund is adequate (Table 4)

### Capacity to repay and Fund obligations
- The country does not have an outstanding debt to the Fund based on existing credit.
- Taking into account the proposed disbursement under the RCF, total obligations to the Fund are projected at:
  - 2.2 percent of exports of goods and services at end-2025.
  - 3.7 percent of international reserves at end-2025.
- Table 4 (selected indicators):
  - Total obligations based on existing and prospective credit (Millions of SDRs): 0.0 (2020–2024), 2.4 (2025), 4.7 (2026–2029), 2.4 (2030), 0.0 (2031–2034).
  - Total obligations based on existing and prospective credit (Millions of U.S. dollars): 0.0 (2020–2024), 3.3 (2025), 6.6 (2026–2029), 3.3 (2030), 0.0 (2031–2034).
  - Percent of exports of goods and services (obligations): 0.0 (2020–2024), 0.20 (2025), 0.40 (2026–2029), 0.30 (2030), 0.20 (2031), 0.00 (2032–2034).
  - Percent of gross international reserves (obligations): 0.0 (2020–2024), 0.40 (2025), 0.70 (2026), 0.60 (2027), 0.60 (2028), 0.50 (2029), 0.20 (2030), 0.00 (2031–2034).
  - Outstanding Fund credit (Millions of SDRs): 23.7 (2020–2024), 23.7 (2025), 21.3 (2026), 16.6 (2027), 11.9 (2028), 7.1 (2029), 2.4 (2030), 0.0 (2031–2034).
  - Outstanding Fund credit (Millions of U.S. dollars): 32.5 (2020), 32.6 (2021), 32.8 (2022), 32.9 (2023), 33.0 (2024), 29.7 (2025), 23.1 (2026), 16.5 (2027), 9.9 (2028), 3.3 (2029), 0.0 (2030–2034).
  - Outstanding Fund credit as percent of exports of goods and services: 5.3 (2020), 4.2 (2021), 3.5 (2022), 3.0 (2023), 2.7 (2024), 2.2 (2025), 1.5 (2026), 1.0 (2027), 0.6 (2028), 0.2 (2029), 0.0 (2030–2034).
  - Outstanding Fund credit as percent of gross international reserves: 5.5 (2020), 5.9 (2021), 5.6 (2022), 5.1 (2023), 4.7 (2024), 3.7 (2025), 2.5 (2026), 1.6 (2027), 0.8 (2028), 0.2 (2029), 0.0 (2030–2034).

### Debt sustainability and risk assessment
- The updated Debt Sustainability Analysis (DSA) shows:
  - Cabo Verde’s risk of external and total debt distress is high, unchanged compared with the 2019 DSA.
  - Public debt is expected to reach 137.4 percent of GDP at end-2020 (124.2 percent of GDP at end-2019).
  - Public debt is forecast to resume a medium-term declining trend in 2021, reaching 99.4 percent of GDP by 2025.
  - Present value of PPG external debt (percent of GDP): ...60.6 (2019), 62.9 (2020), 58.7 (2021), 62.1 (2022), 68.0 (2023), 65.3 (2024), 60.8 (2025), 56.8 (2026), 52.8 (2027), 50.0 (2028).
  - Present value of total debt (percent of GDP, benchmark: 70%): ...96.0 (2019), 95.8 (2020), 92.3 (2021), 92.7 (2022), 106.6 (2023), 103.5 (2024), 96.7 (2025), 90.5 (2026), 85.0 (2027), 80.0 (2028).
- Assessment details:
  - Public debt is assessed as sustainable, supported by manageable debt service indicators, even under various stress scenarios.
  - Debt sustainability is subject to considerable downside risks, including from a more severe or prolonged impact of the COVID-19 shock.
  - Graduating to a moderate risk of external debt distress will require post-COVID-19 policies that refocus on:
    - Fiscal consolidation.
    - Growth-enhancing structural reforms, notably in the SOEs sector.
    - Continuous prudent borrowing policies.

### Safeguards and central bank oversight
- Safeguards assessment:
  - In line with the IMF’s safeguards assessment requirements under the RCF, the BCV has committed to undergo an updated safeguards assessment, originally requested on a voluntary basis under the PCI.
  - The assessment would be completed before the Executive Board’s approval of any subsequent arrangement.
  - The authorities will provide Fund staff with the central bank’s annual audit report and authorize the external auditors to hold discussions with staff.

### COVID-19 impact, staff appraisal, and policy implications
- Economic and social impact:
  - The COVID-19 pandemic is severely affecting Cabo Verde through the global economic downturn, travel restrictions, lockdown on non-essential activities, and restrictions on inter-island travel.
  - Expected effects: contraction in growth, worsening external and fiscal positions, and increased social hardship.
  - Medium-term outlook is generally positive but subject to heightened downside risks; recovery depends on global recovery in 2021, rebound in tourism and domestic activities, and resumption of planned reforms.
- Authorities’ measures:
  - Lockdown in late March after confirmed cases on two islands.
  - Measures adopted to help the corporate sector, households, and vulnerable groups, with support from development partners.
  - Authorities committed to medium-term objectives under the Policy Coordination Instrument (PCI).
- Financing needs and donor support:
  - COVID-19 generated significant fiscal and BOP financing needs; contraction in activity mostly affects revenue mobilization and the BOP via decline in tourism and capital flows.
  - Authorities are partially reorienting policies and drawing down some external buffers.
  - Timely donors’ support is critical given additional spending needs for social protection and healthcare.
- IMF staff support:
  - Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility (RCF) in the amount of SDR 23.7 million (100 percent of quota).
  - These resources will help cover about 15 percent of projected BOP needs.
  - Staff supports making the RCF disbursement direct budget support.
  - Together with loans and grants from other development partners and domestic borrowing, RCF resources will help cover additional fiscal financing needs for 2020.

### Key fiscal and BOP figures (selected)
- Public debt stock (Total nominal government debt, percent of GDP): 125.9 (2017), 124.7 (2018), 123.0 (2019), 124.2 (2020), 118.1 (2021), 137.4 (2022), 132.0 (2023), 122.5 (2024), 114.0 (2025), 106.3 (2026), 99.4 (2027 projected by table header sequence).
- External current account (including official transfers, percent of GDP): -7.9 (2017), -5.4 (2018), -3.0 (2019), -0.2 (2020), -3.9 (2021), -14.3 (2022), -8.6 (2023), -4.7 (2024), -2.6 (2025), -1.7 (2026), -0.5 (2027).
- Gross international reserves (months of prospective imports of goods and services): 5.5 (2017), 5.5 (2018), 5.5 (2019), 8.0 (2020), 5.5 (2021), 6.3 (2022), 5.3 (2023), 5.2 (2024), 5.2 (2025), 5.3 (2026), 5.6 (2027).
- Memorandum items (Table 4):
  - Exports of goods and services (millions of U.S. dollars): 618.5 (2020), 777.5 (2021), 923.6 (2022), 1082.2 (2023), 1234.9 (2024), 1378.4 (2025), 1534.7 (2026), 1662.3 (2027), 1800.7 (2028), 1951.1 (2029), 2114.3 (2030).
  - Debt service (millions of U.S. dollars): 102.8 (2020), 112.0 (2021), 139.0 (2022), 144.2 (2023), 147.5 (2024), 150.1 (2025), 160.0 (2026), 166.6 (2027), 175.2 (2028), 188.0 (2029), 183.1 (2030).
  - Quota (millions of SDRs): 23.7 (all years).
  - Gross international reserves (€ millions, end of period): 594.9 (2020), 549.6 (2021), 580.6 (2022), 639.6 (2023), 701.8 (2024), 811.8 (2025), 907.7 (2026), 1,028.1 (2027), 1,175.5 (2028), 1,346.0 (2029), 1,554.6 (2030).

*Source: IMF staff estimates and projections as presented in the provided content.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Request for IMF Support
- The Government of the Republic of Cabo Verde requests financial support from the IMF in an amount of SDR 23.7 million (100 percent of quota) under the Rapid Credit Facility (RCF).
- Purpose: budget support to mitigate revenue shortfalls and expenditure pressures stemming from the COVID-19 pandemic.
- Financing strategy (as stated in the DSA): additional financing needs for 2020 will be filled by grants, Rapid Credit Facility resources and other concessional loans.

### Economic impact and macroeconomic projections
- The pandemic is severely affecting the tourism-dependent economy; tourism operators estimate tourist arrivals would decline by more than 60 percent if the current situation persists until end-September.
- Preliminary macro impact assessment:
  - Economy projected to contract by 5.5 percent in 2020.
  - Immediate fiscal needs of at least 10 percent of GDP (about US$192 million).
- Key macroeconomic projections from the DSA (baseline):
  - Real GDP growth: 2020 = -5.5 percent; 2021 = 5.0 percent; 2022 = 6.4 percent; 2023 = 6.0 percent; 2024 = 5.7 percent; 2025 = 5.5 percent; 2030 = 5.0 percent.
  - Growth of exports of G&S (US dollar terms): 2020 = -38.6 percent; 2021 = 25.7 percent; 2022 = 18.8 percent.
  - Growth of imports of G&S (US dollar terms): 2020 = -15.8 percent; 2021 = 5.6 percent; 2022 = 7.9 percent.
  - Nominal dollar GDP (Million of US dollars): 2020 = 1,864; 2021 = 2,008; 2022 = 2,194; 2023 = 2,382; 2024 = 2,581; 2025 = 2,778; 2030 = 3,942; 2040 = 7,930.
  - Gross external financing need (Million of U.S. dollars): 2020 = 307.5; 2021 = 191.1; 2022 = 104.0; 2023 = 62.8; 2024 = 44.1; 2025 = 15.7; 2030 = -87.3; 2040 = -683.9.

### Fiscal measures, spending priorities, and commitments
- Fiscal stance: the government will implement a more accommodative fiscal policy guided by the availability of financing and medium-term debt sustainability.
- Immediate government measures:
  - Provide loan guarantees amounting to US$30 million to help the private sector.
  - Flexible payment schedules for tax payments.
  - Measures to guarantee employment and income of workers in the formal sector.
  - Support for vulnerable groups including covering home care for the elderly, food assistance, and other financial support estimated at about US$3.7 million.
- Revenue and expenditure strategy:
  - Reorient spending and use external buffers to create fiscal space.
  - Undertake tax policy reforms and strengthen revenue administration to reverse the decline in revenue collection in the immediate aftermath of the crisis.
  - Reallocate non-priority current expenditures to meet additional pandemic-related spending needs while ensuring the public investment program is not disrupted.
- Institutional commitments related to IMF engagement:
  - A Memorandum of Understanding between the Banco de Cabo Verde (BCV) and the Ministry of Finance clarifying roles for timely servicing of financial obligations to the IMF will be signed.
  - Commitment to undergo an updated safeguards assessment, provide IMF staff access to BCV’s most recently completed external audit reports, and authorize BCV’s external auditors to hold discussions with IMF staff.
  - Authorization for the IMF to publish this Letter of Intent and the staff report for the RCF request.

### Monetary and financial sector policies
- Objectives: strike an appropriate balance between maintaining financial stability and sustaining economic activity.
- BCV measures announced:
  - Reductions in the policy rate, reserve requirements, and overnight lending and deposit rates to improve bank liquidity.
  - Creation of a new long-term liquidity instrument to finance bank lending with a repayment period of three years.
  - Prudential measures including reduction in capital adequacy ratio and provisioning flexibility for banks depending on borrower requests to place a moratorium or forbearance on loan repayment for three months.
  - Continued active liquidity management to ensure continued supply of credit to the domestic economy.

### Debt sustainability analysis (DSA) — summary findings
- Risk ratings:
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
  - Mechanical risk rating under the external DSA: High.
  - Mechanical risk rating under the public DSA: High.
- Summary interpretations:
  - The DSA notes that the shocks from the COVID-19 pandemic will heavily impact tourism and are expected to deepen current account and fiscal deficits, resulting in a higher debt path compared to the previous DSA (July 2019).
  - Both the present value (PV) of PPG external debt-to-GDP ratio and of total public debt-to-GDP ratio breach their respective thresholds over the medium term under the baseline scenario, signaling a high risk of external and overall debt distress.
  - Projections indicate these ratios are particularly sensitive to export, depreciation, and contingent liabilities shocks, but both are projected to gradually decline and fall below their thresholds from 2024 (PPG external) and 2028 (total public), respectively.
  - Debt service indicators are forecast to remain below their respective thresholds.
  - Conclusion: Based on PPG external and overall debt dynamics, PPG debt is deemed sustainable conditional on implementation of prudent fiscal policies following the COVID-19 crisis and manageable debt service ratios.
- Additional DSA details and diagnostics:
  - Composite Indicator score: 3.283, with a classification of strong debt-carrying capacity.
  - Realism tools flagged: None.
  - Realism tools, stress tests, and sensitivity analyses indicate vulnerability to one-time depreciation (noted as the most extreme shock for some indicators) and to export shocks; tailored tests include “Combined contingent liabilities”.
- DSA approvers:
  - Approved by Annalisa Fedelino and Johannes Wiegand (IMF) and Marcello Estevão (IDA).
  - Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA), dated April 16, 2020.

*Source: Appendix I. Letter of Intent; Cabo Verde — Request for Disbursement under the Rapid Credit Facility (April 2020).*

### 1.      On  behalf  of  the  Cabo  Verdean  authorities,  we  would  like  to  express  our  gratitude  to

### On behalf of the Cabo Verdean authorities, we would like to express our gratitude to

### Engagement with the Fund
- IMF disbursement under the Rapid Credit Facility (RCF) in the amount of 100 percent of quota (SDR 23.7 million).
- Executive Board completed the first review under Cabo Verde’s Policy Coordination Instrument (PCI) on March 30.
- PCI performance described as strong and useful for countries vulnerable to exogenous shocks despite not having balance of payments needs at approval.

### Macroeconomic position prior to COVID-19
- Real GDP growth in 2019: 5.7 percent.
- Fiscal accounts in 2019: 0.7 percent of GDP primary surplus.
- Current account deficit in 2019: 0.2 percent of GDP.
- International reserves accumulation in 2019: + €133 million, equivalent to a 25.1 percent increase compared to end-2018.

### Impact of the COVID-19 pandemic
- As of April 20: one fatality (a British tourist in Boa Vista) and a total of 67 cases, mostly in Boa Vista.
- Travel restrictions timeline: prohibited entry of tourists from affected countries in February; ban flights from/to Italy in February; all international flights banned in mid-March; inter-island travel suspended; national state of emergency declared in late March and extended until May 2 for the three most affected islands and April 26 for the remaining islands.
- Economic projections under authorities’ baseline:
  - Real GDP growth for 2020 could decline from 5.5 percent (pre-COVID-19 expectation) to -5.8 percent.
  - Authorities estimate a decline in tourist arrivals of about 60 percent compared to 2019, with special impact in Q2 and Q3 2020.
- Balance of payments and external financing:
  - Staff’s estimate of a total external gap: slightly above 14 percent of GDP relative to the pre-COVID-19 scenario.
  - Remittances expected to drop significantly.

### Policy response
- Fiscal policy:
  - Implementing a less restrictive fiscal policy.
  - Health care spending and social protection expected to increase by more than 1 percent of GDP.
  - Increase in health and social expenditure will be partially compensated by reprioritizing capital spending and containing non-essential current spending.
  - Revenue side: authorities project a significant drop in tax collection.
  - Support to business sector: deferral of certain tax payments up to the end of the year and provision of loan guarantees, especially for micro, small and medium-sized enterprises.
- Monetary and macroprudential policy (Banco de Cabo Verde - BCV):
  - Policy rate, overnight and discount rates cut to record lows.
  - Reserve requirements reduced.
  - Introduction of a new long-term liquidity instrument with a maturity up to three years.
  - Prudential measures: allowing banks to defer loan repayments on request by borrowers with a good standing for three months.
  - Temporary reduction of banks’ capital adequacy ratios until December 2021.
- Authorities’ readiness to take additional actions as the situation evolves.

### Outlook and strategic commitments
- Authorities expect fiscal, monetary and macroprudential measures to attenuate the crisis impact and support employment, businesses and households, especially the most vulnerable.
- Authorities remain confident in a recovery in 2021 once travel restrictions are suspended and global activity gradually resumes, while acknowledging uncertainty about the pandemic’s duration and spread.
- Commitment to medium-term objectives in the 2017/2021 Strategic Plan for Sustainable Development (PEDS) and to the PCI program, with recognition that quantitative fiscal targets will need adjustment in the next review.
- Intent to resume policies and reforms post-crisis to improve the fiscal position, put public debt on a downward trend and further improve the business environment.
- Appeal for international support and solidarity, including through grants and external debt relief.

*Source: Cabo Verde authorities’ statement and IMF staff summary contained in the provided content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1cpvea2020002.pdf_