## 1cpvea2020003

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---

### Executive summary — context and immediate response
- Pre-pandemic performance:
  - Economic growth averaged 5 percent during 2016-19.
  - Inflation low; public debt on a downward trajectory though elevated; fiscal deficit declining; international reserves comfortable.
- COVID-19 impact and policy response:
  - Pandemic threatens to erode prior gains and generated significant financing needs.
  - Authorities implemented policy and healthcare measures, social protection programs, fiscal relief measures, and central bank liquidity measures.
  - IMF Executive Board approved disbursement of SDR 23.7 million (100 percent of quota) under the Rapid Credit Facility (RCF) as direct budget support.

### Macroeconomic outlook and key projections
- 2020 (baseline):
  - Real GDP growth projected to contract by 6.8 percent in 2020.
  - Inflation: -0.2 percent (y/y) at end-June 2020; expected to remain subdued.
  - Current account deficit projected to widen to 14.2 percent of GDP.
  - Gross international reserves (end-2019 to 2025 series in Text Table 2): 2019 = 663 (€ millions), 2020 = 652, 2021 = 573, 2022 = 561, 2023 = 577, 2024 = 594, 2025 = 625.
- 2021:
  - Growth projected to recover to 4.5 percent in 2021 (5 percent under the RCF projection).
  - Current account deficit projected to narrow to 9.2 percent of GDP.
- Medium term:
  - Real GDP projected to stabilize around 6 percent in the medium term (Text Table 2 series: 2022 = 4.8, 2023 = 5.7, 2024 = 6.0, 2025 = 6.2 percent).
  - Inflation expected to remain below 2 percent and move closer to the EU average.
  - Public debt profile (Text Table 2): Public debt 2019 = 125.0, 2020 = 118.1, 2021 = 137.5, 2022 = 134.8, 2023 = 130.0, 2024 = 122.8, 2025 = 114.9, later = 106.3 (percent of GDP series shown).

### Risks and scenarios
- Balance of risks tilted to the downside.
- Main downside risks:
  - Intensity and duration of the pandemic; a more extensive domestic outbreak.
  - Protracted global economic slowdown impacting tourism, remittances, and FDI.
  - High vulnerability to natural disasters; wavering fiscal consolidation; weak structural reform efforts.
- Adverse scenario (Annex II):
  - Growth would contract by 9.3 percent in 2020, with substantially weaker fiscal and external positions, requiring stronger fiscal adjustment and additional external financing.
- Upside risks:
  - Better-than-projected tourism performance, improved agricultural outcomes, increased FDI-driven investments.

### Recent economic developments and sectoral impacts
- Q1 2020:
  - Economy estimated to have expanded by 5.8 percent (y/y).
- Q2 2020:
  - Consumer and business confidence at end-June registered the lowest value in the last sixteen quarters.
  - Exports of goods declined by 45.5 percent (y/y); imports dropped by 25.8 percent.
  - Gross international reserves declined from €684 million at end-February to €650 million at end-June.
  - Credit to the economy declined by about 3 percent (y/y) at end-June.
  - Inflation at end-June was -0.2 percent (y/y), down from 1.6 percent at end-March.
- COVID-19 epidemiology as of end-August:
  - 3,852 cases with 40 deaths; new cases concentrated in Santiago and Sal.

### Fiscal response, revised 2020 budget, and execution
- COVID-19 fiscal package three pillars:
  - (i) strengthening the health care system;
  - (ii) supporting businesses (deferment of some tax payments, loan guarantees for micro, and small and medium-sized enterprises);
  - (iii) expanding social protection programs.
- Revised 2020 budget (basis for 2020 projections):
  - Overall deficit expected to reach 9.7 percent of GDP (compared with 1.7 percent of GDP at the time of the first PCI review and 8.8 percent of GPD under the RCF request).
  - Total revenues projected at 29.2 percent of GDP (32.5 percent of GDP under the first PCI review).
  - Expenditures projected to increase to 38.8 percent of GDP (34.2 percent of GDP under the first PCI review).
  - Capital expenditures projected at 3.8 percent of GDP (4.6 percent under the first PCI review).
  - Revised budget incorporates about CVE 4 billion (2.2 percent of GDP) of contingent expenditures that will not be committed if identified revenues do not materialize.
  - Financing needs increase to 12.1 percent of GDP, covered by: borrowing from government securities market (2.6 percent of GDP), debt service suspension (DSSI) under the G-20 Initiative totaling CVE 890 million (0.5 percent of GDP), and external financing including RCF disbursement.
- Key figures (selected entries from Text Table 3, amounts in CVE millions):
  - Revenue: 68,395 (32.5 percent of GDP) / 49,173 (26.2 percent of GDP) / 53,677 (29.2 percent of GDP)
  - Expenditure: 71,965 (34.2 percent of GDP) / 65,677 (35.0 percent of GDP) / 71,444 (38.8 percent of GDP)
  - Covid related expenditures (RCF projection): 3,917 (2.1 percent of GDP) — Health: 2,663 (1.4 percent of GDP); Education: 513 (0.3 percent of GDP); Social protection: 4,410 (2.4 percent of GDP) [note: category-level numbers shown in source].
  - Primary balance (RCF projection): -12,810 (-7.0 percent of GDP)
  - Overall balance (RCF projection): -17,767 (-9.7 percent of GDP)
  - Financing needs (RCF projection): 22,336 (12.1 percent of GDP)
  - Financing: Domestic (net) 4,847 (2.6 percent of GDP); External (net) 17,489 (9.5 percent of GDP)
  - Nominal GDP: 210,275 / 187,576 / 183,906 (series shown in source)

### Budget execution, transparency, and contingency management
- Budget execution at end-June 2020:
  - Revenue declined by 21.5 percent (y/y).
  - Most affected revenue categories: corporate income taxes, VAT, and non-tax revenues.
  - Expenditures below projections due to curtailed current outlays and significant delays in public investments.
  - Overall deficit higher than expected, but financing needs below projections because of weaker execution of net other liabilities.
- Measures emphasized:
  - Enhanced monitoring of revenue performance; improved use of the Treasury cashflow monitoring plan and spending payment system; ongoing risk assessment of the budget; improved procurement procedures.
  - COVID-19 related expenditures to be published on the Ministry of Finance website and audited by the Court of Auditors.

### Medium-term fiscal outlook, public debt, and DSA findings
- Pandemic derailed medium-term fiscal consolidation program:
  - Pre-pandemic goal: public debt-to-GDP below 100 percent by 2024.
  - COVID-19 impact raised public debt to a projected 137.5 percent of GDP for 2020 (118.1 percent of GDP under the PCI).
  - Public debt projected to decline over the medium term but remain elevated and above 110 percent through 2024.
- Staff view on returning to sustainability requires:
  - (i) decisive revenue-enhancing measures immediately after the pandemic (including digitalization in tax administration; streamlining exemptions on VAT and excises; improve tax compliance; enhance collection of tax arrears; reverse tax relief measures);
  - (ii) continued strengthening of expenditure management and restraint in non-priority current expenditures;
  - (iii) renewed momentum in SOEs reforms.
- Debt distress assessment:
  - September 2020 joint World Bank/IMF Debt Sustainability Analysis (DSA) shows risk of external and total debt distress is high.
  - Public debt assessed as sustainable, supported by manageable debt service indicators, but vulnerable to downside shocks.
- DSA key projections and indicators (selected exact figures):
  - Public sector debt (percent of GDP): 2019 = 125.0; 2020 = 137.5; 2021 = 134.8; 2022 = 130.0; 2023 = 122.8; 2024 = 114.9; 2025 = 106.3.
  - PV of PPG external debt-to-GDP ratio: 2019 = 58.8; 2020 = 69.2; 2021 = 65.8; 2022 = 63.8; 2023 = 59.9; 2024 = 55.5; 2025 = 52.0.
  - Real GDP growth assumptions (selected): 2019 = 5.7; 2020 = -6.8; 2021 = 4.5; 2024 = 6.0; 2025 = 6.2.

### Monetary policy response and outlook
- Exchange rate and reserves:
  - Conventional fixed peg: CVE 110.265 per euro.
  - BCV targets reserves equivalent to 30 percent of broad money to protect peg.
  - International reserves at end-2019: 8.9 months of prospective imports of goods and services (€663.4 million) — assessed as adequate.
- BCV accommodative measures:
  - Reduction in the policy rate by 125 basis points to 0.25 percent.
  - Reduction in the minimum reserve requirement from 13 to 10 percent.
  - Reduction in the overnight deposit rate by 5 basis points to 0.05 percent.
  - Establishment of a long-term liquidity support facility for banks.
  - BCV will refocus over the medium term on maintaining gross international reserves equivalent to at least 5 months of prospective imports of goods and services.
- Monetary policy reforms recommended:
  - Improve monetary policy transmission, address low turnover in interbank market, excess liquidity, and limited government securities market development.
  - Reforms undertaken: symmetric interest rate corridor; link BCV’s main long-term sterilization instrument to the policy rate; publish MPC minutes; prepare composite index of economic activity.

### Financial sector stability, supervision, and reforms
- Systemic indicators at end-March 2020:
  - Regulatory capital to risk-weighted assets (CAR): 18.6 percent (regulatory minimum 12 percent).
  - Return on equity: 5.3 percent.
  - Non-performing loans (NPLs): 10.1 percent of total loans.
- Prudential and relief measures:
  - Countercyclical capital buffer reduced by 2 percentage points.
  - Recommendation for nonpayment of dividends on 2019 incomes.
  - Call on banks to grant loan payment moratorium without implications for NPLs and provisioning.
- Staff recommendations:
  - Enhanced supervision, vigilance on lending standards and risk management, enhanced NPL reporting and monitoring, collection of information on moratoria scope and borrower exposures.
- AML/CFT and correspondent banking:
  - Strong improvements; National Commission on AML/CFT established.
  - Cabo Verde fully compliant with all EU commitments and removed from the EU’s gray list.
- Financial sector reforms planned for 2020-21 (selected Reform Targets):
  - Operationalization of the credit registry and information system (Reform Target).
  - Establishment of a functional central registry for mobile collateral (Reform Target).
  - Development of a centralized official balance sheets database for the corporate sector.

### Structural reforms and growth-enhancing measures
- Priority reforms to support recovery and medium-term growth:
  - Strengthen linkages between tourism and agriculture.
  - Develop inter-island maritime transportation.
  - Complete infrastructure projects in three islands: port in Maio, ship terminal in São Vicente, and water and sanitation plant in Santiago.
  - Advance SOE reforms and privatizations (timelines adjusted due to COVID-19).
  - Operationalize Sovereign Private Investment Guarantee Fund (SPIGF) — Strategy Note prepared April 2020; SPIGF resources: TF held at central bank of Portugal totaled €106 million at end-2019; liabilities (TCMFs) totaled €102.7 million.
  - SPIGF: TRMCs to be issued, governance and asset/liability treatment outlined in SN; operationalization targeted before end-2020.

### Program modalities, monitoring, and staff recommendations
- Performance under PCI:
  - All end-March 2020 quantitative targets met except the floor on tax revenue (narrowly missed).
  - Primary balance target met; net other liabilities ceiling observed; NIR exceeded target.
  - All non-quantitative continuous targets met.
- Staff supports:
  - Completion of the second review under the PCI.
  - Modification of quantitative targets for end-September 2020 and new timelines for reform targets for the third review.
- Main program risks:
  - Prolonged COVID-19 crisis; broader downside risks could hamper implementation.
- Safeguards and capacity development:
  - BCV committed to an updated safeguards assessment; capacity development priorities include revenue administration, public financial management, monetary operations, financial regulation and supervision, and statistics.
- Staff appraisal highlights:
  - Temporary widening of fiscal deficit appropriate to accommodate pandemic impact; need to unwind temporary measures as recovery gains momentum and accelerate fiscal reforms.
  - Returning to pre-COVID public debt trajectory requires post-pandemic fiscal consolidation, SOE reforms, growth-enhancing structural reforms, and continued reliance on highly concessional loans.
  - Monetary stance accommodative and appropriate; BCV should monitor Euro area developments to protect the peg.

*Prepared by the Staff of the International Monetary Fund and the International Development Association; sources: Cabo Verdean authorities and IMF staff estimates and projections as presented in the specified content unit.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- The Cabo Verdean economy faces considerable challenges from the COVID-19 pandemic. Prior to the health crisis:
  - Economic growth averaged 5 percent during 2016-19.
  - Inflation was low.
  - The fiscal deficit was declining.
  - Public debt was on a downward trajectory (though elevated).
  - International reserves were at comfortable levels.
- The pandemic threatens to erode these gains and has generated significant financing needs.
- Authorities implemented policy and healthcare measures, social protection programs, fiscal relief measures, and central bank liquidity measures. The IMF Executive Board approved disbursement of SDR 23.7 million (100 percent of quota) under the Rapid Credit Facility (RCF) as direct budget support.

### Macroeconomic outlook and key projections
- 2020:
  - Real GDP growth projected to contract by 6.8 percent in 2020 (baseline).
  - Inflation expected to remain subdued; inflation was -0.2 percent (y/y) at end-June 2020.
  - Current account deficit projected to widen to 14.2 percent of GDP in 2020.
  - Gross international reserves (end-2019 to 2025 series in Text Table 2): 2019 = 663 (€ millions), 2020 = 652, 2021 = 573, 2022 = 561, 2023 = 577, 2024 = 594, 2025 = 625.
- 2021:
  - Growth projected to recover to 4.5 percent in 2021 (5 percent under the RCF projection).
  - Current account deficit projected to narrow to 9.2 percent of GDP.
- Medium term:
  - Real GDP projected to stabilize around 6 percent in the medium term (Text Table 2 shows: 2022 = 4.8, 2023 = 5.7, 2024 = 6.0, 2025 = 6.2 percent under projections series).
  - Inflation expected to remain below 2 percent and move closer to the EU average.
  - Public debt profile (Text Table 2): Public debt 2019 = 125.0, 2020 = 118.1, 2021 = 137.5, 2022 = 134.8, 2023 = 130.0, 2024 = 122.8, 2025 = 114.9, later = 106.3 (percent of GDP series shown).

### Risks and scenarios
- Balance of risks tilted to the downside.
  - Main downside risks: intensity and duration of the pandemic; a more extensive domestic outbreak; protracted global economic slowdown impacting tourism, remittances, and FDI; high vulnerability to natural disasters; wavering fiscal consolidation; weak structural reform efforts.
  - Adverse scenario (Annex II): growth would contract by 9.3 percent in 2020, with substantially weaker fiscal and external positions, requiring stronger fiscal adjustment and additional external financing.
  - Upside risks: better-than-projected tourism performance, improved agricultural outcomes, and increased FDI-driven investments.

### Recent economic developments and sectoral impacts
- Q1 2020:
  - Economy estimated to have expanded by 5.8 percent (y/y), driven by investment and private consumption; supply-side support from construction, industry and energy, and transport and communications.
- Q2 2020:
  - Weakening evident: consumer and business confidence at end-June registered the lowest value in the last sixteen quarters; tourism turned negative.
  - Exports of goods declined by 45.5 percent (y/y); imports dropped by 25.8 percent.
  - Gross international reserves declined from €684 million at end-February to €650 million at end-June.
  - Credit to the economy declined by about 3 percent (y/y) at end-June.
  - Inflation at end-June was -0.2 percent (y/y), down from 1.6 percent at end-March.
- COVID-19 epidemiology as of end-August:
  - 3,852 cases with 40 deaths.
  - Community transmission contained somewhat in most islands; new cases concentrated in Santiago and Sal.

### Fiscal developments and budget execution
- Budget execution at end-June 2020:
  - Revenue declined by 21.5 percent (y/y).
  - Most affected revenue categories: corporate income taxes, value-added taxes (VAT), and non-tax revenues.
    - Causes: fiscal relief postponements (corporate income taxes payment from May to August), weak domestic demand, nonrealization of privatization receipts, and lower proceeds from government services.
  - Expenditures below projections due to curtailed current outlays and significant delays in public investments.
  - Overall deficit higher than expected, but financing needs were below projections because of weaker execution of net other liabilities.
- Text Table 1 (selected entries, amounts in CVE millions):
  - Revenue 2019Q2 = 25,094; 2019Q1 = 37,803; 2019 = 57,391; 2020Q1 = 13,312; 2020Q2 Act. = 11,911; 2020 Q2 Prog. = 28,042; 2020 Prol. = 19,710.
  - Tax 2019Q2 = 20,219; Taxes on income and profit 2019Q2 = 6,381; Taxes on goods and services 2019Q2 = 9,811.
  - Expenditure 2019Q2 = 25,796; Expense 2019Q2 = 24,119; Net acquisition of nonfinancial assets 2019Q2 = 1,676.
  - Primary balance 2019Q2 = 1,880; Overall balance 2019Q2 = -701.
  - Net other liabilities 2019Q2 = -2,674; Financing needs 2019Q2 = 3,375.

### Performance under the Policy Coordination Instrument (PCI)
- Overall strong performance under the PCI, demonstrating commitment to policies and reforms.
  - All end-March 2020 quantitative targets were met except for the floor on tax revenue (narrowly missed due to shortfalls in corporate income tax and VAT).
  - Primary balance target met because of under-execution of current and capital expenditures.
  - Ceiling on net other liabilities observed due to slower disbursement of onlent loans, larger-than-projected repayments, and slower execution of capitalization operations.
  - Net international reserves (NIR) exceeded target: NIR stood at €669 million at end-March compared with €572 million under the PCI.
  - All non-quantitative continuous targets were met.
  - Reform targets (RTs): All RTs for the second review implemented except RT on streamlining exemptions on customs duties, VAT and excises (partially met by introduction of a minimum customs duty of 5 percent on previously exempted goods).
  - Additional actions: preparation of Strategy Note for Sovereign Private Investment Guarantee Fund operationalization; changes to the special tax regime introduced and to be tabled in parliament before end-2020; streamlining of exemptions on VAT under preparation with electronic invoicing.

### Staff views and program implications
- Staff supports:
  - Completion of the second review under the PCI.
  - Modification of quantitative targets for end-September 2020.
  - Modification of timeline for completion of remaining reform targets.
- Staff notes that macroeconomic prospects are considerably worse than PCI projections and worse than the revised macroeconomic framework for the RCF.

### Policy discussions and reform priorities
- Focus areas:
  - Effective implementation of measures to address the health crisis.
  - Modifications to program targets to account for COVID-19 economic impact.
  - Authorities’ post-COVID policy and updated reform agenda for recovery.
- Structural reform priorities to support recovery and medium-term growth:
  - Strengthen linkages between tourism and agriculture sectors.
  - Develop inter-island maritime transportation.
  - Complete infrastructure projects in three islands: port in Maio, ship terminal in São Vicente, and water and sanitation plant in Santiago.

*CABO VERDE — INTERNATIONAL MONETARY FUND. September 30, 2020.*

### 7.      The authorities put in place a fiscal policy package to mitigate the economic and social

### 1cpvea2020003 - 7.      The authorities put in place a fiscal policy package to mitigate the economic and social

### Fiscal response and revised 2020 budget
- COVID-19 fiscal package covered three pillars:
  - (i) strengthening the health care system: expansion of laboratory capacity, purchase of medical equipment and supplies, improvement in emergency preparedness and response, and strengthening of human resources capacity in the health sector;
  - (ii) supporting businesses: deferment of payment for some taxes to the end of the year, and the provision of loan guarantees, especially for micro, and small and medium-sized enterprises;
  - (iii) expanding social protection programs.
- Authorities indicated policies would be temporary and well-targeted.
- Revised 2020 budget projections (basis for 2020 projections):
  - Overall deficit expected to reach 9.7 percent of GDP (compared with 1.7 percent of GDP at the time of the first PCI review and 8.8 percent of GPD under the RCF request).
  - Revenue shortfall:
    - Total revenues projected at 29.2 percent of GDP (32.5 percent of GDP under the first PCI review).
    - Tax revenue at the lowest level of the last three years.
  - Increased expenditures:
    - Expenditures projected to increase to 38.8 percent of GDP (34.2 percent of GDP under the first PCI review).
    - Capital expenditures projected at 3.8 percent of GDP (4.6 percent under the first PCI review).
    - Revised budget incorporates about CVE 4 billion (2.2 percent of GDP) of contingent expenditures that will not be committed if identified revenues do not materialize.
  - Financing needs and coverage:
    - Net other liabilities projected at 2.5 percent of GDP.
    - Financing needs increase to 12.1 percent of GDP.
    - Covered by: borrowing from government securities market (2.6 percent of GDP), debt service suspension (DSSI) under the G-20 Initiative totaling CVE 890 million (0.5 percent of GDP), and external financing including RCF disbursement.
- Key figures from Text Table 3 (PCI / First Review / Project. RCF):
  - Revenue: 68,395 (32.5 percent of GDP) / 49,173 (26.2 percent of GDP) / 53,677 (29.2 percent of GDP)
  - Taxes: 48,066 (22.9 percent of GDP) / 33,793 (18.0 percent of GDP) / 33,952 (18.5 percent of GDP)
  - Grants: 5,959 (2.8 percent of GDP) / 5,959 (3.2 percent of GDP) / 8,566 (4.7 percent of GDP)
  - Other revenue: 14,370 (6.8 percent of GDP) / 9,421 (5.0 percent of GDP) / 11,159 (6.1 percent of GDP)
  - Expenditure: 71,965 (34.2 percent of GDP) / 65,677 (35.0 percent of GDP) / 71,444 (38.8 percent of GDP)
  - Expense: 62,386 (29.7 percent of GDP) / 55,415 (29.5 percent of GDP) / 64,537 (35.1 percent of GDP)
  - Covid related expenditures: ...... / 2,222 (1.2 percent of GDP) / 3,917 (2.1 percent of GDP)
    - Health: ...... / 672 (0.4 percent of GDP) / 2,663 (1.4 percent of GDP)
    - Education: ...... / 0 (0.0 percent of GDP) / 513 (0.3 percent of GDP)
    - Social protection: ...... / 1,550 (0.8 percent of GDP) / 4,410 (2.4 percent of GDP)
  - Net acquisition of nonfinancial assets: 9,579 (4.6 percent of GDP) / 8,029 (4.3 percent of GDP) / 6,907 (3.8 percent of GDP)
  - Primary balance: 2,093 (1.0 percent of GDP) / -10,804 (-5.8 percent of GDP) / -12,810 (-7.0 percent of GDP)
  - Overall balance: -3,569 (-1.7 percent of GDP) / -16,504 (-8.8 percent of GDP) / -17,767 (-9.7 percent of GDP)
  - Net other liabilities: -4,718 (-2.2 percent of GDP) / -4,718 (-2.5 percent of GDP) / -4,569 (-2.5 percent of GDP)
    - Onlending to SOEs for investment purpose: -2,101 (-1.0 percent of GDP) / -2,101 (-1.1 percent of GDP) / -3,379 (-1.8 percent of GDP)
    - Other onlending (net): -1,294 (-0.6 percent of GDP) / -1,294 (-0.7 percent of GDP) / -894 (-0.5 percent of GDP)
    - Capitalization: -1,448 (-0.7 percent of GDP) / -1,448 (-0.8 percent of GDP) / -1,445 (-0.8 percent of GDP)
  - Financing needs: 8,288 (3.9 percent of GDP) / 21,222 (11.3 percent of GDP) / 22,336 (12.1 percent of GDP)
  - Financing:
    - Domestic (net): 797 (0.4 percent of GDP) / 797 (0.4 percent of GDP) / 4,847 (2.6 percent of GDP)
    - External (net): 7,491 (3.6 percent of GDP) / 20,426 (10.9 percent of GDP) / 17,489 (9.5 percent of GDP)
      - Of which IMF RCF: 3,273 (1.7 percent of GDP) / 3,213 (1.7 percent of GDP)
  - Nominal GDP: 210,275 / 187,576 / 183,906

### Budget execution, transparency, and contingency management
- Enhanced revenue and expenditure monitoring emphasized as essential:
  - Revenue protection measures: enhanced monitoring of revenue performance to prevent noncompliance and tax evasion.
  - Improved use of the Treasury cashflow monitoring plan and spending payment system to strengthen expenditure management and prevent accumulation of domestic payment arrears.
  - Ongoing risk assessment of the budget to inform preparation of additional contingency measures.
  - Staff reiterated call for measures to improve procurement procedures that hamper execution of public investments.
- Transparency and accountability:
  - COVID-19 related expenditures to be executed in line with government transparency and accountability practices.
  - These expenditures are being published on the website of the Ministry of Finance and will be audited by the Court of Auditors at the time of the 2020 budget audit.

### Medium-term fiscal outlook and debt sustainability
- Pandemic derailed medium-term fiscal consolidation program:
  - Pre-pandemic program envisaged public debt-to-GDP below 100 percent by 2024.
  - COVID-19 impact raised public debt to a projected 137.5 percent of GDP for 2020 (118.1 percent of GDP under the PCI).
  - Public debt projected to decline over the medium term but remain elevated and above 110 percent through 2024.
  - Under the baseline scenario, the primary balance projected to narrow to 3.8 percent of GDP in 2021 and financing needs expected to decline to 6.4 percent of GPD, supporting a reversal in debt dynamics, with the stock of debt projected below 135 percent of GDP.
- Staff stressed that returning to medium-term fiscal and debt sustainability objectives will require:
  - (i) decisive revenue-enhancing measures immediately after the pandemic, with priority areas including increasing digitalization in tax administration for collection, inspection and audit functions; streamlining exemptions on VAT and excises (Reform Target); improving tax compliance and risk management; strengthening post-customs clearance controls; enhancing the collection of tax arrears; and reversing the tax relief measures;
  - (ii) continued strengthening of expenditure management and restraint in non-priority current expenditures;
  - (iii) renewed momentum in SOEs reforms.
- Debt distress assessment:
  - September 2020 joint World Bank/IMF Debt Sustainability Analysis (DSA) shows risk of external and total debt distress is high, unchanged from April RCF DSA.
  - Public debt assessed as sustainable, supported by manageable debt service indicators.
  - Downside risks: more severe or prolonged COVID-19 shock, contingent liabilities associated with SOEs, exports and growth shocks.
  - Reducing public debt-to-GDP in the medium term requires post-pandemic sustained fiscal consolidation, growth-enhancing structural reforms and continuous prudent borrowing policies relying on highly concessional loans.

### Monetary policy response and outlook
- Exchange rate and reserves:
  - Conventional fixed peg: currency pegged to the euro (CVE 110.265 per euro).
  - BCV targets reserves equivalent to 30 percent of broad money to protect peg.
  - International reserves at end-2019: 8.9 months of prospective imports of goods and services (€663.4 million) — assessed as adequate.
- BCV accommodative measures to support liquidity and credit:
  - (i) reduction in the policy rate by 125 basis points to 0.25 percent;
  - (ii) reduction in the minimum reserve requirement from 13 to 10 percent;
  - (iii) reduction in the overnight deposit rate by 5 basis points to 0.05 percent;
  - (iv) establishment of a long-term liquidity support facility for banks.
  - BCV will refocus over the medium term on maintaining gross international reserves equivalent to at least 5 months of prospective imports of goods and services.
- Monetary policy reforms recommended:
  - Continue improving monetary policy transmission mechanism and BCV role in liquidity management.
  - Address constraints: very low turnover in interbank market, excess liquidity in banking system, limited development of government securities market.
  - Reforms undertaken: establishment of a symmetric interest rate corridor; linking BCV’s main long-term sterilization instrument to the policy rate; regular publication of minutes of the MPC’s meetings.
  - Completion of a composite index of economic activity expected to strengthen near-term forecasting and improve monetary policy analysis.
- BCV recapitalization plan:
  - 2019 plan to inject CVE 2.1 billion over three years from the budget; first tranche CVE 700 million released in late 2019.
  - Authorities plan to reassess release of remaining balance after the health crisis when fiscal position strengthens.

### Financial sector stability and supervision
- Systemic indicators at end-March 2020:
  - Regulatory capital to risk-weighted assets (CAR): 18.6 percent (regulatory minimum 12 percent).
  - Return on equity: 5.3 percent.
  - Non-performing loans (NPLs): 10.1 percent of total loans.
- Staff recommendations and observations:
  - Vigilance and enhanced supervision to contain vulnerabilities in banks' lending standards and risk management.
  - BCV to continue working with banks on resolution when crisis abates; some banks had written-off legacy loans; foreclosure compliance monitored.
  - New prudential measures during the health crisis require careful monitoring:
    - Countercyclical capital buffer reduced by 2 percentage points.
    - Recommendation for nonpayment of dividends on 2019 incomes.
    - Call on banks to grant loan payment moratorium without implications for NPLs and provisioning.
  - Staff highlighted risks to bank governance from moratoria and recommended enhanced NPL reporting and monitoring mechanisms, collection of information about scope of moratoria, identification of borrowers and exposures, and improved disclosure quality.
  - A comprehensive analysis of moratorium impact will be needed after the pandemic to measure loan losses and guide policy.
- AML/CFT and correspondent banking:
  - Strong improvements in AML/CFT framework, establishment of the National Commission on AML/CFT.
  - Staff encouraged continued strengthening to meet FATF compliance requirements and improve domestic risk management capacity to avoid loss of correspondent banking relationships (CBRs).
  - Cabo Verde now fully compliant with all EU commitments and removed from the EU’s gray list.
- Financial sector reforms planned for 2020-21:
  - (i) operationalization of the credit registry and information system (Reform Target);
  - (ii) establishment of a functional central registry for mobile collateral (Reform Target);
  - (iii) development of a centralized official balance sheets database for the corporate sector to facilitate risk-based supervision.
  - Some intermediary steps delayed by COVID-19.

### Structural reforms and growth-enhancing measures
- Reinvigoration of structural reforms from 2021 critical to return to pre-COVID medium-term growth trajectory; SOEs reforms are particularly important and significantly delayed by COVID-19.
- Privatization operations reprogrammed; new strategies will be needed post-pandemic given impact on companies slated for privatization.
- Other reform priorities:
  - Access to finance remains important; 2019 financial ecosystem (loan guarantees, venture capital, capacity building for SMEs) to support recovery.
  - Sovereign Private Investment Guarantee Fund (SPIGF) expected to become operational by end-2020 to facilitate access to international capital markets for large companies investing in capital-intensive projects; SPIGF to be set up in line with Strategy Note completed in April 2020 under the PCI.
  - Authorities preparing new medium-term development strategy (Cabo Verde Ambitions 2030) to replace the expiring Strategy for Sustainable Development (PEDS); expected to be completed before end-2020.

### Program modalities and flexibility
- Staff proposes modification of quantitative targets (QTs) and new timelines for completion of reform targets for the third review to provide flexibility under the program in view of uncertainties and constraints generated by the health crisis.

*Sources: Cabo Verdean authorities; and IMF staff estimates.*

### 22.      Modification of quantitative targets. Consistent with the revised macroeconomic

### 22. Modification of quantitative targets. Consistent with the revised macroeconomic

### Modification of quantitative and reform targets
- Proposed modification of QTs for the third PCI review (September 2020 test date): tax revenues, primary balance, net other liabilities, and the nominal level of new concessional external debt of the central government (PS Table 1).
- Proposed changes to the timeline for two reform targets due to administrative capacity constraints and COVID-19 priorities:
  - Streamlining of tax exemptions: with completion of streamlining of exemptions on import duties, the new reform target will focus on actions covering the VAT and excises, with a completion date of end-December 2020 (PS ¶9; Table 2).
  - Creation of a functional registry of mobile collateral: completion date now proposed for mid-January 2021 (PS ¶24; Table 2).

### Program financing and fiscal framework
- The program is fully financed for 2020 through a combination of external and domestic financing.
- External financing sources: World Bank, the African Development Bank, the IMF, key bilateral development partners, and the DSSI.
- Domestic financing comprises government securities issued in the domestic market in line with the country’s regulation that caps total net domestic financing to 3 percent of GDP annually.
- The fiscal framework for 2021 is also fully financed.

### Risks, safeguards, and capacity development
- Main risk to program implementation: a prolonged COVID-19 crisis.
- Broader downside risks to the medium-term outlook could hamper program implementation if they materialize.
- Safeguard assessment: the BCV has committed to undergo an updated safeguards assessment and has authorized staff to contact its external auditors.
- Capacity development (CD) strategy areas: revenue administration and tax policy, public financial management, monetary operations, financial regulation and supervision, and statistics.
- Staff encouraged continued use of remotely delivered TA during the COVID-19 crisis.

### Staff appraisal — macroeconomic outlook and policy advice
- COVID-19 impact and growth projections:
  - The Cabo Verdean economy has been severely impacted by the COVID-19 pandemic; economic activity is projected to contract heavily in 2020.
  - Growth is expected to recover to 4.5 percent in 2021 and to stabilize around 6 percent in the medium term, contingent on sustained global recovery and resumption of tourism, capital flows, and structural reforms.
  - Key downside risks: intensity and duration of the pandemic, climate change and natural disasters.
  - Staff encourages preparation for an adverse scenario and readiness to take mitigating measures if downside risks materialize.
- Fiscal policy:
  - Authorities have taken timely and appropriate measures to address economic and social impacts of COVID-19, focusing fiscal measures on expanding healthcare and social protection services.
  - As recovery gains momentum, it is essential to unwind temporary measures and accelerate fiscal reforms.
  - Transparency and accountability for COVID-19 related expenditures are important; staff commends publication of all COVID-19 related expenditures and commitment to audit these outlays with the annual budget.
  - Staff supports the temporary widening of the fiscal deficit to accommodate the pandemic’s economic impact, welcoming revenue protection measures, enhanced treasury cash flow management, and contingent expenditures identified by the authorities.
- Debt and debt sustainability:
  - The risk of debt distress is high, though public debt remains sustainable.
  - The joint World Bank/IMF DSA indicates Cabo Verde’s risk of external and total debt distress is high, and debt sustainability is subject to important downside risks.
  - Returning to the pre-COVID trajectory for public debt will require post-COVID policies and reforms refocusing on fiscal consolidation, SOEs reforms, growth-enhancing structural reforms, and continued reliance on highly concessional loans.
- Monetary policy and financial sector:
  - The current accommodative monetary policy stance is appropriate.
  - Easing measures include reduction in the policy rate, the overnight deposit and lending rates, as well as the minimum reserve requirement to increase liquidity and support credit expansion.
  - Staff encourages the BCV to monitor developments in the Euro area and stand ready to adjust the monetary policy stance as needed to protect the peg.
  - The financial system remains stable and adequately capitalized; prudential measures by the BCV have limited the health crisis’ impact on the banking system.
  - Deteriorating macroeconomic conditions could impact banks’ asset quality in the environment of high NPLs; BCV should, in consultation with banks, identify vulnerabilities and risk factors to take relevant regulatory actions.
- AML/CFT:
  - Staff welcomes authorities’ improvement of the AML/CFT framework that have helped maintain CBRs.
  - Establishment of the National Commission on AML/CFT is welcome.
  - Staff encourages further progress to avoid loss of CBRs in view of Cabo Verde’s dependence on remittances and emigrants’ deposits.

*Source: IMF staff report excerpt (section 22 and STAFF APPRAISAL) contained in the provided content unit.*

### 35.      Staff supports the completion of the second review under the PCI and the

### 1cpvea2020003 - 35. Staff supports the completion of the second review under the PCI and the

### Program assessment and staff recommendation
- Staff supports the completion of the second review under the PCI, the change in target dates for remaining reform targets, and the modification of quantitative targets for the third review.
- Authorities’ performance and commitment:
  - All end-March 2020 quantitative targets met, except for the floor on tax revenues, narrowly missed due to the impact of COVID-19.
  - All non-quantitative targets were observed.
  - All, but one, reform targets were met.

### Recent economic developments (real economy, external sector, inflation, tourism)
- Key narrative findings:
  - Before the pandemic, economic growth was robust, driven by services and construction.
  - Confidence indicators point to a deterioration in the economic climate due to the pandemic.
  - Tourism arrivals improved steadily in recent years but would decline significantly in 2020 due to the impact of the pandemic.
  - International reserves position was strong reflecting the improvement in the current account and higher FDI.
  - Headline inflation has declined reflecting mainly lower international oil prices.
- Selected headline statistics (from staff projections and authorities’ data):
  - Real GDP: Real GDP3.74.55.75.0-5.5-6.85.04.54.85.76.06.2
  - Exports of goods and services: Exports of goods and services8.715.910.09.2-37.3-47.324.725.917.515.514.912.6
  - Of which: tourism: Of which: tourism14.610.08.69.5-60.9-65.7 46.8 32.5 27.6 17.3 16.8 11.6
  - Gross international reserves (months of prospective imports): Gross international reserves (months of prospective imports)5.5 5.68.95.56.3 7.3 5.36.7 6.3 6.05.8 5.9
  - Current account (including official transfers, percent of GDP): Current account (incl. official transfers, percent of GDP)-7.8-5.20.3-3.9-14.3-14.2-8.6-9.2-6.4-4.1-2.1-1.8

### External sector developments
- 2019 outcome and 2020 projection:
  - In 2019 the current account deficit narrowed owing to an increase in exports and a deceleration in imports.
  - The current account is projected to worsen in 2020 due to the impact of COVID-19 on tourism.
- Financing composition:
  - The deficit has been financed mainly by foreign direct investment and other investments.
- Tourism and remittances:
  - Tourism receipts would decline in 2020 but still remain an important contributor to export performance.
  - While declining in 2020, remittances remain an important source of foreign currency, supporting the country’s strong reserve position.

### Fiscal sector developments
- Key narrative findings:
  - Fiscal performance has continuously improved in recent years but is projected to worsen in 2020 due to COVID-19.
  - Recent improvements were due to strong performance in tax and non-tax revenues and a decline in capital expenditures.
  - Current expenditures are projected to increase in 2020, partly due to higher COVID-19 related expenditures on goods and services.
  - Net other liabilities increased in 2019 mainly reflecting support to SOEs and are projected to remain elevated in 2020, contributing to an increase in financing needs.
- Selected fiscal statistics:
  - Revenue (percent of GDP): Revenue28.628.229.432.526.629.227.529.228.928.929.229.8
  - Overall balance (incl. grants, percent of GDP): Overall balance-3.0-2.7-1.8-1.7-8.4-9.7-4.1-6.6-3.7-1.8-0.8 0.0
  - Financing needs (percent of GDP): Financing Needs (Percent of GDP)3.33.75.13.911.312.15.16.43.92.01.00.2

### Monetary and financial sector developments
- Key narrative findings:
  - Broad money (M2) declined in June 2020 driven mainly by net domestic assets.
  - The decline reflected a deceleration in credit to the economy, despite excess reserves in the banking system.
  - Nonperforming loans have declined from the peak in 2014 but remain elevated.
  - Lending rates have declined in recent years.
- Selected monetary statistics:
  - Broad money (M2) (12-month change): Broad money (M2)6.51.48.46.2-5.5-5.23.14.56.47.77.77.6
  - Credit to the economy (annual percent change): Credit to the economy4.41.92.32.5-1.10.93.73.74.24.03.7 3.5

### Risks and policy priorities
- Main risks identified (from the Risk Assessment Matrix):
  - External: Prolonged Covid-19 outbreak — Relative Likelihood: High; Impact if realized: High. Policy response: Build resilience to shocks and accelerate growth-enhancing reforms.
  - External: Widespread social discontent and political instability — Relative Likelihood: High; Impact if realized: Medium. Policy response: Build external and fiscal buffers and accelerate growth-enhancing reforms.
  - External: More protectionism — Relative Likelihood: High; Impact if realized: Medium. Policy response: Build external and fiscal buffers and accelerate growth-enhancing reforms.
  - Domestic: Faltering fiscal consolidation efforts — Relative Likelihood: Medium/High; Impact if realized: High. Policy response: Ensure relief measures are temporary; advance revenue-enhancing reforms; improve capital expenditure management; reduce fiscal risks linked to SOEs; contain non-priority spending.
  - Domestic: 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, and enhance growth potential.

### Operational timeline (PCI reviews)
- Schedule of reviews under the PCI:
  - Board discussion of the PCI request: July 15, 2019
  - First Review: Test Date September 30, 2019 — Review Date March 30, 2020
  - Second Review: Test Date March 31, 2020 — Review Date September 21, 2020 (note: Board meeting will take place in October; delay due to COVID-19-related constraints)
  - Third Review: Test Date September 30, 2020 — Review Date January 15, 2021

*Source: Cabo Verdean authorities; and IMF staff estimates and projections.*

### Annex I. Sovereign Private Investment Guarantee Fund—

### Annex I. Sovereign Private Investment Guarantee Fund— Operationalization Strategy

### Background
- The authorities decided to create a Sovereign Private Investment Guarantee Fund (SPIGF) using part of resources accumulated during 2008–18 in a trust fund (TF) held at the central bank of Portugal.
- Resources in the TF amounted to €106 million at end-2019 while liabilities (government bonds – Titulos Consolidados de Mobilizacão Financeira – TCMFs) attached to these assets totaled €102.7 million.
- The SPIGF aims to support private sector development and growth by facilitating access to international capital markets for private companies that, under Cabo Verdean law, invest in capital-intensive projects.

### The Strategy Note for the Operationalization of the SPIGF
- At end-April 2020, the authorities prepared a Strategy Note (SN) providing a conceptual framework for the operationalization of the SPIGF. The SN was revised in July to provide more clarity, particularly on potential implications for public debt.
- Key points covered in the SN:
  - Treatment of TCMFs and issuance of TRMCs
    - As of end-2019, the TCMFs were held by the pension fund (INPS) and the central bank (BCV).
    - An agreement was reached for the repurchase of all TCMFs by INPS; ongoing discussions for the repurchase by INPS of TCMFs held by BCV are expected to be completed in the coming weeks.
    - Under the authorities’ new approach, the total stock of TCMFs will be swapped against income securities (Títulos-Rendimentos de Mobilizacão de Capital - TRMCs) to be issued by the SPIGF, extinguishing the TCMFs by replacing a debt instrument with an equity position in the SPIGF.
    - As a result, the Treasury will no longer issue bonds to replace the TCMFs as previously envisaged.
    - The law creating the SPIGF specifies that ownership of TRMCs confers the right to dividends, and that they are tradable.
  - Statistical recording of assets and liabilities
    - The SPIGF was set up as an autonomous trust exclusively responsible for liabilities, duties and responsibilities related to its activities.
    - Under the authorities’ current approach, both assets and liabilities from the previous TF will be transferred to the SPIGF. On this basis, they will not be reflected in public finance statistics since the current coverage excludes data on public entities’ activities.
  - Governance arrangements
    - Governance framework comprises the Board of Directors and the Supervisory Body; SPIGF’s accounts will be subject to internal and external audits.
    - Board of Directors: governing body composed of a President and two members appointed by the Minister of Finance for a maximum of five years, after review by the General Council of the Chamber of Commerce.
    - The Executive Board sets up internal rules and investment guidelines to be approved by the Minister of Finance.
    - The Supervisory Board: advisory and monitoring role—monitors execution of guaranteed projects; reviews investment guidelines before submission to the Minister of Finance; monitors and reviews the financial soundness of the SPGIF; monitors developments related to risks; advises the Board of Directors; reviews the fund’s pricing schedule; provides opinions on strategic questions at the SPIGF’s request.
  - Assets management principles and project selection
    - Key operational aspects (investment rules, selection criteria for guarantees) will be determined by the Board of Directors.
    - The law prohibits the SPIGF from:
      - investing in bonds and other securities issued by private or public companies, and in real estate beyond properties strictly necessary for the SPIGF’s operations;
      - providing guarantees for government bonds and financing;
      - providing guarantees, directly or indirectly, for public companies or private companies with direct or indirect State shareholding of at least 25 percent;
      - operating in the primary market for government securities;
      - providing loans to third parties.
  - Accumulation and withdrawal rules
    - The law creating the SPIGF does not contemplate liquidity withdrawals.
    - SPIGF’s capital would be raised through TRMCs.
  - Transparency and accountability mechanisms
    - Continued management of the SPIGF’s assets by the central bank of Portugal based on an agreement between the central bank of Portugal and the government.
    - The Board of Directors will seek a rating, aiming for a minimum rating of “A”, and the evaluation report will be made public.
    - Only parliament can terminate the SPIGF, on a government proposal.
    - The SPIGF’s annual report and financial statements, prepared by the Board of Directors, will be audited and submitted for review to the Supervisory Board before approval by the Minister of Finance in the three months following the end of the fiscal year.
  - Revenues and cost of liabilities
    - Revenues: fees charged on guarantees granted for investment projects (taking into account beneficiary company’s risk level) and investment income.
    - Cost of liabilities: in the current configuration, SPIGF’s liabilities are made of TRMCs remunerated with net dividends.
  - Risks to net earnings and mitigation
    - Risk assessment to be carried out by SPIGF management in line with guidelines and selection criteria.
    - Mechanisms to prevent losses:
      - SPIGF will have privileged creditor status on the assets of companies benefiting from its guarantees; if a guarantee is called, SPIGF retains privileged creditor's rights until full reimbursement and, if needed, assumes a position on the company’s Board.
      - By law, the SPIGF is subject to prudential ratios set by the BCV.

### Next Steps
- The authorities plan to operationalize the SPIGF before end-2020 as called for under the law.
- Timeline prepared: SPIGF’s management institutions will be set up once TCMFs held by BCV have been repurchased by INPS.

*Source: Cabo Verdean authorities; and International Monetary Fund.*

### 127.8 percent of GDP in 2016 to 125 percent of GDP in 2019. As Cabo Verde continues to rely on

### 1cpvea2020003 - 127.8 percent of GDP in 2016 to 125 percent of GDP in 2019. As Cabo Verde continues to rely on

### Recent economic and financial developments (pre-COVID and early 2020)
- Public debt declined from 127.8 percent of GDP in 2016 to 125 percent of GDP in 2019.
- Debt service averaged about 2.7 percent of GDP during the period under review due to reliance on concessional loans.
- Current account moved from a deficit of 3.8 percent of GDP in 2016 to a surplus of 0.3 percent of GDP in 2019.
- International reserves increased from 541 million euros in 2016 to 663.4 million euros in 2019.
- Tourism and FDI:
  - Number of tourists rose from 644.429 in 2016 to 819.308 in 2019.
  - Sustained FDI in the tourism sector.
- Structural reforms reduced inefficiencies in public enterprises and fiscal risks through restructuring and privatization, with very positive results in 2019, particularly in air and maritime transport.

### COVID-19 shock, containment measures, and immediate impacts
- Pandemic developments and health outcomes:
  - Following robust growth at end-March 2020 (5.8 percent, y/y), growth decelerated sharply.
  - Total confirmed COVID-19 cases reached 3,852 at end-August, with 40 deaths.
  - Community transmission continued in Santiago and Sal; Boa Vista contained after initial spread.
- Government containment and preparedness actions (timeline and measures):
  - Late February: body temperature scans in airports; suspension of official travel to China and other heavily affected countries; quarantine areas prepared; suspension of flights from affected European countries, the United States, Brazil, Senegal and Nigeria; maritime traffic suspension; quarantine of Boa Vista island.
  - Late March: state of emergency declared; social distancing measures; travel restrictions between islands; lockdown for non-essential activities.
  - Late May onward: gradual reopening—state of emergency lifted for all islands on May 29; phased resumption plan including:
    - maritime connections and restaurants on June 1 (passengers to Boa Vista, restaurants with regular hours);
    - inter-island air travel on July 15;
    - maritime connections to Santiago on July 15;
    - cultural and sporting events on October 1.
  - Implementation of a digital platform for tracking positive COVID-19 cases; training and safety certification for tourism sector staff; increased healthcare capacity in tourism-dominated islands.
- Relief measures introduced to mitigate economic and social impacts:
  - Ensure adequate liquidity in the banking system and ease access to credit.
  - Provide corporate sector relief, notably on tax obligations.
  - Support the informal sector.
  - Help the most vulnerable groups address the health crisis impact.
- Sectoral and labor market impacts:
  - Strongest impact in services: hotels, restaurants, transport, and other tourism-linked services.
  - Company liquidity problems leading to layoffs and contract suspensions; informal sector income losses.
  - Unemployment estimated to rise from 11.3 percent in 2019 to about 19 percent in 2020, affecting mostly the informal sector and women.
- Q1 and Q2 indicators:
  - Preliminary Q1: Real GDP growth estimated at 5.8 percent (y/y) with investment and private consumption main contributors.
  - End-June: exports of merchandise decreased by 20 percent; imports of capital goods dropped by about 23 percent.
  - Consumer and business confidence declined since March.
  - Inflation declined to -0.2 percent (y/y) at end-June (1.6 percent at end-March).
  - Budget execution end-March: primary surplus vs programmed deficit of CVE 2 billion; both revenues and expenditures lower than projected.
  - Overall budget deficit estimated at CVE 5.6 billion (preliminary June data show revenue underperformance continued; corporate income tax well-below June 2019 level).

### Performance under the Policy Coordination Instrument (PCI) and reform implementation
- Quantitative targets at end-March 2020:
  - All met except tax revenue.
  - Primary balance target met due to under-executed expenditures.
  - Tax revenue floor slightly below programmed level due to lower-than-projected taxes on income/profit and VAT.
  - Payments on net other liabilities largely below programmed ceiling.
  - No accumulation of domestic or external payment arrears.
  - Nominal level of new concessional external debt of the central government well-below target.
  - 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 intensified restrictions on payments/transfers; no multiple currency practices; no inconsistent bilateral payment agreements; no import restrictions for balance-of-payments reasons).
- Reform targets (RTs) for second PCI review:
  - All except one RT met; most ahead of schedule.
  - RT on streamlining exemptions on customs duties, VAT and excises partially met:
    - Law adopted in December 2019 eliminating all exemptions on customs duties and introducing a minimum tariff of 5 percent for previously exempted goods.
    - Report on special tax regime expected in the coming months; changes to VAT code under preparation.
  - Other measures:
    - Monitoring of SOEs’ financial situation and quarterly reports prepared.
    - BCV continued publishing minutes of Monetary Policy Committee meetings.
    - Strategy Note on management of the Sovereign Private Investment Guarantee Fund (SPIGF) prepared at end-April.
- Additional reforms:
  - National commission on AML/CFT established in January 2020; members appointed.
  - EU recognized progress in measures to remain off the gray list and reduce associated risks:
    - Joining the Global Forum on Transparency and Exchange of Information for Tax Purposes.
    - Network of agreements covering all EU member states.
    - Amending harmful tax regimes.
    - Implementing OECD/G20 Inclusive Framework on BEPS minimum standard.

### Outlook, projections, and risks
- Prospects for 2020:
  - Real GDP growth projected to contract by 6.8 percent in 2020 (was expected to expand by 5 percent before the pandemic).
  - Current account deficit projected to widen to 14.2 percent of GDP.
  - Gross international reserves estimated to decline to 90 million euros (compared with an accumulation of 45 million euros anticipated before COVID-19).
  - Inflationary pressures expected to remain low.
- Medium-term outlook:
  - Growth projections: increase by 4.5 percent in 2021 and gradually rise to 6.2 percent by 2025.
  - Current account deficit expected to narrow to 1.8 percent of GDP by 2025.
  - Recovery contingent on global economic recovery (especially Europe), resumption of tourism and capital flows, continued government support for recovery, structural reforms, improved business environment, strengthened linkages between tourism and other activities, and SME development.
  - Growth supported by completion of large infrastructure projects: port in Maio, ship terminal in São Vicente, water and sanitation plant in Santiago, and other projects in upcoming development strategy.
- Downside risks:
  - High uncertainty on the duration and impact of the pandemic.
  - Prolonged global slowdown would deepen impacts on tourism, transport flows, remittances, and FDI, causing stronger contraction and higher fiscal and balance-of-payments financing needs.
  - Climate change and natural shocks represent additional significant downside risks.

### Fiscal policy, debt sustainability, and medium-term fiscal plans
- COVID-19 impact on fiscal and debt outlook:
  - Original medium-term goal: bring public debt below 100 percent of GDP by 2023 via improved primary balance, revenue enhancement, and expenditure management.
  - COVID-19 altered the medium-term framework; projected public debt increased to 137.5 percent of GDP at end-2020 (compared to 118.1 percent of GDP originally).
- Medium-term fiscal projections:
  - Total revenue (excluding grants) projected to recover to 28.7 percent of GDP by 2025.
  - Expenditures projected to decline to 29.8 percent of GDP over the medium term, with capital outlays at 3 percent of GDP.
  - Primary balance projected to improve from a deficit of 3.8 percent of GDP in 2021 to a surplus of 2.5 percent of GDP in 2025.
  - Public debt projected to reach 106.3 percent of GDP in 2025 under current projections.
- 2021 policy focus and revenue/expenditure measures:
  - Revenue-enhancing measures planned for 2021 include:
    - inspections and audits;
    - implementation of the 5 percent customs duties on previously exempted imports;
    - introduction of electronic invoicing;
    - intensified use of IT systems to monitor tax payments;
    - enhanced post-customs clearance controls for imported merchandise;
    - continued collection of tax arrears.
  - ECOWAS Common External Tariff (CET) expected to become effective in Cabo Verde in 2021; CET rates estimated to have a positive impact on revenue because CET rates are higher than current rates in Cabo Verde.
  - Revenue and expenditure projections for 2021:
    - Revenues (excluding grants) projected at CVE 49.7 billion (25.6 percent of GDP).
    - Current outlays projected at about CVE 60 billion (30.8 percent of GDP), including costs for social programs, purchase of COVID-19 vaccine, enhanced health security in airports, equipment for two hospitals to be built in Sal and Boa Vista.
    - Capital expenditures projected at CVE 9.7 billion (5.2 percent of GDP).
    - Financing needs projected at 6.4 percent of GDP, and public debt at 134.8 percent of GDP.
  - Public investment execution acceleration and prioritization:
    - Review of public investment portfolio initiated.
    - Priority to complete three donor-funded projects in transportation (World Bank), water and sanitation for Santiago (JICA), and information technology (African Development Bank), which account for more than 80 percent of projected capital expenditures.
- Revised 2020 budget and fiscal effects:
  - Total revenue (excluding grants) projected at 45.1 billion CVE (24.5 percent of GDP) compared to 62.4 billion CVE (29.7 percent of GDP) in the original budget.
  - Tax relief measures adopted in relation with COVID-19 (temporary and well-targeted):
    - moratorium on tax payment through December 2020;
    - reduction of the VAT rate to 10 percent for the tourism sector;
    - government guarantees for new financing or refinancing from the banking system.
  - Revenue protection measures: enhanced monitoring of tax payments through IT systems to prevent noncompliance and evasion.
  - Additional budget grants related to COVID-19 are expected (no numeric value provided in source for projected grants).

### Priority policy actions and reform acceleration
- Short-term priorities (remainder of 2020 and 2021):
  - Alleviate social and economic impacts of COVID-19 and support economic recovery.
  - Enhance revenue collection and strengthen expenditure management.
  - Advance SOE reforms to support fiscal and debt sustainability.
  - Improve monetary policy transmission mechanism and strengthen the financial system.
  - Promote access to finance and improve the business environment to boost broad-based growth and resilience to shocks.
  - Implement planned revenue measures and phase out 2020 fiscal relief measures as conditions allow.
  - Continue measures to support tourism resumption, including health security upgrades and staff training.
  - Maintain vigilance on downside risks (pandemic duration, global slowdown, climate and natural shocks) while implementing policies to mitigate impacts.

*International Monetary Fund — content unit: 1cpvea2020003*

### 8.6 billion CVE (4.7 percent of GDP), including 2.6 billion CVE of new grants from Cabo Verde’s

### 1cpvea2020003 - 8.6 billion CVE (4.7 percent of GDP), including 2.6 billion CVE of new grants from Cabo Verde’s

### Fiscal response and expenditures
- COVID-19 related support package totals 8.6 billion CVE (4.7 percent of GDP), including 2.6 billion CVE of new grants from Cabo Verde’s development partners.
- Expenditures projected at 71.4 billion CVE (38.8 percent of GDP).
- Downward revisions in some expense categories totaling 2.1 billion CVE compared with the original budget, including:
  - wage bill (reduced official travel, suspension of recruitment and promotions);
  - purchase of goods and services;
  - debt service (impact of the G-20 initiative on suspension of external debt service to bilateral creditors).
- Increased expenditures related to the health crisis:
  - healthcare measures totalling 2.7 billion CVE;
  - COVID-19 mitigating measures in the education sector amounting to 513 million CVE;
  - social protection measures for vulnerable families for 741 million CVE;
  - employment protection measures totalling 760 million CVE.
- Other policy actions: support liquidity for households and businesses; accelerate public investment in water, transport and IT; enhance agriculture mitigation program; support municipalities’ response to COVID-19.
- Capital expenditures projected at 6.9 billion CVE (decline vs original budget and 2019 due to project delays). Measures planned to accelerate execution, particularly for ongoing projects.

### Fiscal outcomes, deficits, and financing needs
- Primary balance projected to deteriorate from a surplus of about 2 billion CVE (1 percent of GDP) in the original budget to a deficit of 12.8 billion CVE (7 percent of GDP).
- Overall deficit projected at 17.8 billion CVE (9.7 percent of GDP).
- Net other liabilities totaling 4.6 billion CVE.
- Financing needs projected at 22.3 billion CVE (12.1 percent of GDP), to be covered by:
  - domestic financing from the government securities market amounting to 4.8 billion CVE (2.6 percent of GDP);
  - net external financing of 17.5 billion CVE;
  - debt relief under the G-20 initiative totaling CVE 890 million.
- Additional grants and budget loans intended to create fiscal space for COVID-19 spending and mitigate drop in domestic revenue.

### Budget execution, cash management, and safeguards
- Revised budget identified expenditures tied to the collection of some revenues, estimated at 4 billion CVE (2.2 percent of GDP), given uncertainties on the duration of the pandemic.
- Enhanced management and monitoring of the Treasury cash flow plan to avoid accumulation of arrears or unplanned debt accumulation.
- Execution of COVID-19 expenditures will be tracked and published on the official website of the Ministry of Finance and audited by the Tribunal of accounts at the time of the 2020 budget audit.

### Borrowing policy and debt management
- Zero limit on nonconcessional external loans will be observed.
- Priority on creating a comprehensive and integrated debt database covering domestic and external debt obligations to:
  - enhance recording and validation of debt data;
  - facilitate payment of debt service obligations;
  - support debt monitoring and reporting;
  - facilitate revision of the Medium-term Debt Strategy for 2020-2024 and preparation of an annual borrowing plan scheduled for launch before the end of the year.

### Monetary policy
- Monetary policy geared to support price stability and protect the credibility of the peg to the euro.
- Central bank objective: keep international reserves to at least 5 months of prospective imports of goods and services.
- BCV relief measures effective April 1:
  - reduction in the policy rate by 125 basis points to 0.25 percent;
  - reduction in minimum reserve requirements from 13 to 10 percent;
  - reduction in the overnight deposit rate by 5 basis points to 0.05 percent;
  - reduction in the rate of permanent lending facilities by 250 basis points to 0.5 percent;
  - establishment of a long-term financing facility for banks to guarantee liquidity.
- BCV to enhance liquidity management, monetary policy transmission, publish Monetary Policy Committee minutes, strengthen analytical and near-term forecasting tools, and complete preparation of the composite index of economic activity.
- Government recapitalization plan for BCV under original plan: CVE 2.1 billion for 2019-21, with first tranche of CVE 700 million released at end-2019; additional allocations to be reassessed after the health crisis.

### Financial sector reforms and relief measures
- Financial system stable; banks adequately capitalized.
  - At end-2019, regulatory capital to risk weighted assets well-above regulatory minimum of 12 percent.
  - NPLs declined from peak 14.3 percent of total loans in 2014 to 12.2 percent at end-March 2019 and 10.1 percent at end-March 2020.
- BCV prudential relief measures for COVID-19:
  - moratorium on loan repayments for eligible borrowers;
  - reduction of capital adequacy ratio from 12 percent at end-2019 to 11 percent for 2020 and 10 percent for 2021;
  - recommendation that banks not distribute 2019 dividends to strengthen capital.
- BCV monitoring priorities:
  - monitor impact of moratorium on banks’ asset quality given current NPL levels;
  - enhance NPLs reporting and monitoring mechanisms;
  - encourage banks to collect information on operations benefiting from the moratorium and improve disclosure and borrower monitoring.
- Financial sector reform priorities (timeframes adjusted for COVID-19):
  - continue implementation of recommendations from the 2013 and 2015 asset quality review (follow-up on main debtor exposures, monitor assets received in kind, reinforce NPLs and provisions where identified).
  - Revamp public credit registry and information system by end-December 2020 (Reform Target): completion of procurement and development of relevant software system.
  - Create functional central registry of mobile collateral by end-December 2020 (Reform Target): Legal Regime published April 30; online platform construction scheduled to start in September 2020; registry operational in mid-January 2021.
  - Strengthen banks’ lending standards and risk management via enhanced supervision, off-site and on-site inspections.
  - Develop centralized official balance sheets database for the corporate sector (expected to be completed this year) in cooperation with INE.
  - Ensure Financial Stability Committee becomes operational with regulations and quarterly meetings.
  - Ensure effective operation of the National Commission for the development of the financial system (periodic meetings, operating regulations, Action Plan adoption by Council of Ministers).
  - Continue implementation of recommendations from the February 2015 report on access to financing for SMEs: after law on public credit registry passed July 7, 2020, priorities include adoption of regulations, platform functioning, and provision of quality information to banks.
  - Implement recommendations from the EU assessment in the Global Action on Cybercrime Extended regarding combatting cybercrimes.

### Public enterprises reforms
- Continue advancing public enterprises reforms to support growth and reduce fiscal risks; monitoring of key SOEs via quarterly reports (Reform target).
- Recent report: overall SOE losses declined compared to 2018; except former airline TACV (privatized March 2019), other key SOEs recorded a positive result in 2019.
- SOEs prepared revised budgets for 2020 and submitted to the Ministry of Finance to reflect COVID-19 impacts.
- Privatization/timing updates:
  - Privatization of CV handling and establishment of concession for airport services (ASA), originally planned end-June, now expected before end-2020.
  - Progress on privatization of ELECTRA planned for December 2020.
  - Sale of remaining State shares (39 percent) in CVA originally expected end-March 2020 now planned for 2021; strategy focuses on sale on the Stock exchange.
  - Privatizations in health sector (INPHARMA, State 40% stake; EMPROFAC) originally planned June 2020: new strategy to be determined after the health crisis.
  - Licensing of port services (ENAPOR) through concession delayed (did not take place in May 2020); preparatory work to reassess market interest and update business plan initiated.
  - Report on liabilities of privatized SOEs and implications for government budget to be prepared by mid-2021.

### Other structural reforms and private-sector support
- Government strategy rests on three pillars:
  - Short-term measures to help private sector address pandemic impact and preserve employment (relief on tax and social security obligations; secure liquidity).
  - Enhanced use of 2019 instruments to support access to finance:
    - support for SMEs via Pro-Capital, Pro-Garante and Pro-Empresa to facilitate guarantees, venture capital, capacity development.
    - operationalize Sovereign Private Investment Guarantee Fund (SPIGF) set up by law June 2019; Strategy Note prepared April 2020; SPGIF’s management institutions to be put in place before end of the year.
  - Preparation of longer term development strategy “Cabo Verde Ambitions 2030” (expected completion in the coming months).

### Program monitoring, targets, and reviews
- Progress monitored through quantitative targets and standard non-quantitative continuous targets (Table 1) and reform targets (Table 2). Quantitative targets defined in the Technical Memorandum of Understanding attached to the Program Statement.
- Third and final review of the program scheduled to be completed by the IMF Executive Board no later than January 15, 2021.

*Source: IMF staff and Cabo Verde authorities (Program Statement and Technical Memorandum of Understanding).*

### 1.      The central government includes all units of budgetary central government. It does not

### 1cpvea2020003 - 1.      The central government includes all units of budgetary central government. It does not

### A. Central government definition and primary balance
- The central government includes all units of budgetary central government. It does not include local government (municipalities), extra-budgetary units, social security funds and public corporations.
- The central government primary balance is defined as total tax and non-tax revenues and grants minus primary expenditure and covers non-interest government activities as specified in the budget.
- The central government primary balance will be measured as cumulative flow over the calendar year.
  - Revenues are recorded when the funds are transferred to a government revenue account. Tax revenues are recorded as net of tax refunds.
  - Central government primary expenditure is recorded on a cash basis and covers recurrent expenditures and capital expenditure.
- 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 requirement: Data for program monitoring will be provided to the Fund by the Directorate National of Planning (DNP) of Ministry of Finance monthly with a lag of no more than six weeks from the end of-period.

### B. Cumulative floor on central government tax revenue
- Tax revenues refer to revenues from tax collection. It excludes all revenues from asset sales, grants, and non-tax revenues.
- The program will have a floor on central government tax revenues to gauge the impact of tax policy reforms and improvements in tax administration. The revenue target is calculated as the cumulative flow from the beginning of the calendar year.
- Reporting requirement: Data will be provided to the Fund by the DNP monthly with a lag of no more than six weeks from the end of-period.

### C. Ceiling on net other liabilities
- Net Other Liabilities is defined as the sum of central government deposits, loans to state-owned enterprises (SOEs) and municipalities (onlending), capitalization, and other assets. The ceiling will be measured as cumulative over the calendar year.
- Definitions:
  - Deposits: all claims, represented by evidence of deposit, on the deposit-taking corporations (including the central bank).
  - Onlending: domestic and external loans contracted by the central government from another institution and then onlending the 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 made by the central government into corporations to capitalize or recapitalize these corporations.
  - Other assets: other accounts receivable/payable such as trade credit and advances and miscellaneous other items due to be paid or received.
- Reporting requirement: Data will be provided to the Fund by the DNP of Ministry of Finance monthly with a lag of no more than six weeks from the end of-period.

### D. Non-accumulation of domestic payments arrears
- The government will not accumulate any new domestic payments arrears. This is monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations.
- Definition of arrears for program purposes:
  - A domestic payment obligation to suppliers is deemed to be in arrears if it has not been paid within the normal grace period of 60 days (30 days for government salaries and debt service) or such other period either specified by the budget law or contractually agreed with the supplier after the verified delivery of the concerned goods and services, unless the amount or the timing of the payment is subject to good faith negotiations between the government and the creditor.
- Reporting requirement: The DNP will submit on a quarterly basis a detailed table of the stock of domestic payments arrears, including the accumulation, payment, rescheduling and write-off of domestic payments arrears during the quarter. The data are to be provided within six weeks after the end of the quarter.

### E. Ceiling on nominal level of new concessional external debt of the central government
- External public debt is debt to nonresidents contracted or guaranteed by the central government and comprises the external debt of the central government and the external debt of the official sector entities and SOEs guaranteed by the central government.
- Definition of debt follows Point 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107), adopted December 5, 2014), including:
  - Loans, suppliers’ credits, and leases (with the debt value for leases equal to the present value at inception of all lease payments expected during the agreement, excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Ceilings on medium- and long-term, as well as on short-term, concessional external debt constitute quantitative targets.
- Coverage: budget loans, projects and program loans, and on-lending loans to SOEs in line with the fiscal program.
- Concessional debt definition: a debt is concessional if it includes a grant element of at least 35 percent. Grant element = (nominal value − PV of debt) / nominal value, with PV calculated by discounting future debt-service payments at the 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 = nominal value.
- Exclusions: debt rescheduling and debt reorganization; new concessional external debt excludes normal short-term (less than one year) import-related financing.
- Reporting requirement: Government will consult Fund staff before assuming liabilities if uncertain whether instrument falls under target. Details of all new external debt (including government guarantees), indicating terms and creditors, will be provided quarterly within six weeks of the end of each quarter.

### F. Non-concessional external debt contracted or guaranteed by the central government
- Ceilings on medium- and long-term, as well as on short-term, non-concessional external debt constitute quantitative targets. The zero ceiling on non-concessional external debt is on a continuous basis.
- Non-concessional debt definition: debt with a grant element of less than 35 percent, with PV calculated using the unified discount rate of 5 percent. For debts with grant element equal or below zero, PV = nominal value.
- Exclusions: debt rescheduling and debt reorganization; 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 the definition of non-concessional external debt.
- Reporting requirement: Government will consult Fund staff when uncertain and provide details of all new external debt (including guarantees) quarterly within six weeks of the end of each quarter.
- Note: The quantitative target excludes borrowing from the Fund.

### G. Net international reserves (NIR) of the central bank
- The floor on the stock of NIR of the BCV constitutes a quantitative target.
- 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 abroad, 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 an original maturity of less than a year, any net off-balance-sheet position (futures, forwards, swaps, or options), any arrears on principal and interest to external creditors and suppliers, and purchases from the IMF.
- The program floors for the NIR will be adjusted downward by:
  - 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 calculating adjusters, these flows will be valued at current exchange rates.
- Reporting requirement: A table on the NIR prepared by the BCV will be transmitted on monthly basis, with a maximum delay of four weeks.

### H. Non-accumulation of external payments arrears
- The government will not accumulate any new external payments arrears. This is a continuous target and will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations.
- Definition for program monitoring: external payments arrears are the 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 requirement: Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted quarterly by the DNP within six weeks of the end of each quarter. The government will inform Fund staff immediately of any accumulation of external arrears.

### I. Memorandum item: floor on central government social spending
- The indicative floor on social spending of the central government applies only to expenditures incurred by the central government on plans and programs intended to have a positive impact on education, health, and social protection, excluding the wages and salaries component.
- Reporting: Data measured as cumulative over the fiscal year and 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
- Data on exports and imports, including volume and prices compiled by the Director of Customs and the BCV, will be transmitted quarterly within five weeks after the end of each quarter.
- A preliminary quarterly balance of payments, compiled by the BCV, will be forwarded within six weeks after the end of each quarter.
- The 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 will be transmitted annually within three months after the end of the following year (15 months after the closing date).
- The consolidated balance sheet of ASA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year will be transmitted annually within three months after the end of the following year (15 months after the closing date).

### Debt Sustainability Analysis — key findings
- Document: Cabo Verde: Joint Bank-Fund Debt Sustainability Analysis.
- Risk ratings:
  - Risk of external debt distress High
  - Overall risk of debt distress High
  - Granularity in the risk rating Sustainable
  - Application of judgement No
- Summary findings:
  - The risk of external and overall debt distress remains high, unchanged from the joint DSA of April 2020.
  - The present value (PV) of public and publicly-guaranteed (PPG) external debt-to-GDP ratio breaches its threshold during 2020–24 under the baseline, and protractedly under stress test scenarios.
  - The PV of total public debt-to-GDP ratio is projected to breach its threshold during 2020–27 under the baseline scenario and during 2020–31 under stress test scenarios.
  - The assessment predicates on assumptions including:
    - A gradual recovery of economic activity in 2021.
    - Reprofiling of debt service of all official bilateral creditors under the debt service suspension initiative (DSSI).
    - Growth-friendly fiscal consolidation in the post-pandemic period.
    - Resumption of structural reforms, notably to restructure SOEs and improve the business environment.
  - Policy recommendations: Prudent borrowing policies, strengthened debt management, and measures to enhance the functioning of the government securities market are critical to stabilizing debt dynamics. Sustained progress in export and output diversification is needed for long-term debt sustainability.

### Public debt coverage and contingent liability stress test calibration
- Coverage:
  - Social security fund and local governments are excluded from the DSA; extra budgetary funds (EBFs) coverage is focused on government support to SOEs through onlending and capitalization operations.
  - Government guarantees to SOEs’ external borrowing are included; publicly-guaranteed domestic debt and non-guaranteed SOE debt are excluded due to limited repayment-schedule information.
- Tailored contingent liability stress test adjustments:
  - Default shock for other elements of the general government not captured: raised to 0.3 percent of GDP (from default 0 percent) to account for government-guaranteed domestic borrowing of municipalities (CVE 623.4 million (0.3 percent of GDP) at end-December 2019).
  - Default shock for SOEs’ debt: raised to 24.3 percent of GDP to reflect vulnerabilities associated with:
    - Publicly-guaranteed domestic debt by ELECTRA, Newco, TACV, IFH, ENAPOR and CERMI amounting to CVE 13.1 billion (6.7 percent of GDP) at end-2019; and
    - Non-guaranteed domestic debt of loss-making SOEs totaling CVE 34.3 billion (17.6 percent of GDP) at end-2019.
  - Default shock for PPPs: 1.1 percent of GDP (kept in line with previous DSA).
  - Financial market shock: default minimum value of 5 percent of GDP retained given most banks are foreign-owned and well-capitalized.
  - Total (2+3+4+5) in percent of GDP: 30.7

*Prepared by the Staff of the International Monetary Fund and the International Development Association, September 30, 2020.*

### 3.      The stock of public debt stood at 125 percent of GDP at end-2019 (Text Figure 1). It declined

### 1cpvea2020003 - 3.      The stock of public debt stood at 125 percent of GDP at end-2019 (Text Figure 1). It declined

### Public debt stock and composition
- The stock of public debt stood at 125 percent of GDP at end-2019.
- It declined from its peak of 128.4 percent of GDP in 2016.
- External debt accounts for 73.2 percent of the total stock of public debt.
- Domestic debt accounts for over 60 percent of debt service since most of the external debt is on concessional terms.
- The total stock of non-guaranteed domestic debt stood at CVE 80.0 billion at end-2019, of which CVE 34.3 billion represented borrowing by eight SOEs (ELECTRA, TACV, ICV, SCS, FIC, EHTCV, APN, and LEC).

### External debt profile and terms
- Cabo Verde’s public external debt is highly concessional.
- Main bilateral and multilateral creditors: Multilateral institutions (notably the World Bank and the African Development Bank) are the main creditors; Portugal is the main bilateral creditor.
- Average maturity of external debt: about 30.2 years.
- Average interest rate of external debt: below 1 percent.
- Currency composition: More than two third of the external debt portfolio is euro-denominated; exchange rate risks are limited since the Cabo Verdean escudo (CVE) is pegged to the euro.
- Commercial loans mainly consist of debt owed to Caixa Geral de Depósitos (CGD) with average maturity of 20 years and average interest rate of 1.55 percent.

### Domestic debt structure and holders
- At end-2019, domestic debt accounted for 26.8 percent of total public debt.
- Domestic debt composition: mainly Treasury bonds (97 percent).
- Average maturity of domestic debt: about 7.5 years.
- Average interest rate on domestic debt: 4.7 percent.
- Holders of government securities: banking sector 60 percent; social security fund 38 percent; households 2 percent.

### Publicly-guaranteed debt
- Publicly guaranteed debt stood at CVE 15.4 billion (7.9 percent of GDP) at end-2019.
- State guarantees are mainly issued for SOEs’ domestic debt (85 percent of the stock), which reached 6.7 percent of GDP at end-2019.
- Guaranteed external debt covers TACV debt contracted with a consortium of foreign banks.
- Guaranteed domestic debt primarily comprises liabilities of ELECTRA, Newco, TACV, IFH, Enapor and CERMI to the domestic banking system and Stock Exchange; plus borrowing by a few municipalities (amounts significantly smaller).
- Legal/regulatory framework: Decree-Law 42 of June 29, 2018 regulates issuance and management of State guarantees and requires the Minister of Finance’s approval for issuance of loan guarantees; the annual guarantee ceiling is indicated in budgets submitted to parliament.
- Parliament passed a new Public Debt Law on December 28, 2019, which set limits on short-term and medium-term borrowing and specified instruments to be used.

### Private external debt and statistics improvements
- Historical series of private external debt indicate a relatively low stock of about 10 percent of GDP at end-2019.
- Private debt includes both bank and non-bank external debt.
- The central bank (BCV) compiles and publishes non-financial corporations’ private debt stock statistics.
- Progress in external sector statistics (ESS): migration of BOP and IIP statistics to BPM6 and reporting of quarterly IIP.

### Outlook and key macroeconomic assumptions (baseline)
- Baseline scenario predicated on a gradual economic recovery starting in 2021.
- Real GDP growth projections:
  - 2021: 4.5 percent
  - Medium term: 6.2 percent
- By 2025:
  - Fiscal deficit is expected to be eliminated (fiscal deficit -> 0.0 percent of GDP by 2025 in Text Table 4).
  - External current account deficit projected to narrow to 1.8 percent of GDP.
- Projected total financing needs over medium term: 0.2 percent of GDP.
- Assumed mobilized external budget support through 2020-22: US$168 million (2.7 percent of GDP), of which 73 percent anticipated from multilateral sources (World Bank and African Development Bank).
- Assumed domestic debt profile in medium term: bonds with maturities of at least 4 years account for 97 percent of the stock.
- Assumed interest rates: T-bills 1 percent; short-term bonds 4 percent; medium to longer-term bonds 5 percent.
- Debt service suspension under the DSSI amounts to US$ 8.96 million (about 0.5 percent of GDP) in 2020 and is assumed to be reprofiled for 2021–24 in line with the Initiative.

### Short-term shock and baseline realism assessments
- The current shock (COVID-19) is severe with large uncertainties on duration and impact; a prolonged health crisis could stall recovery, deepen 2020 contraction, delay rebound, and increase balance of payments and fiscal financing needs.
- DSA realism tools findings:
  - Projected debt accumulation in 2020-21 similar to previous DSA, slightly higher after 2022.
  - Higher current account deficit and lower FDI negatively contribute to PPG external debt accumulation; higher primary fiscal deficit contributes to gross public debt accumulation.
  - Projected three-year fiscal adjustment in the primary balance stands at 1.5 percentage points of GDP between 2019 and 2022 and lies in the second quartile of past LIC adjustments.
  - Projected growth path for 2020 and 2021 is revised down relative to past DSA and is not in line with multiplier-based projections due to pandemic shock.
  - Q1 2020 output rose by 5.8 percent (y/y), then forecasted to decelerate by 6.8 percent in 2020 consistent with two-month lockdown in April; 2021 growth projected at 4.5 percent contingent on gradual revival of tourism and authorities’ reforms.
  - Public investment is expected to hover around 4-5 percent of GDP in the medium term; private investment projected to rise gradually to about 40 percent of GDP during 2020–25.

### Country classification and debt-carrying capacity
- Debt-carrying capacity assessed as “strong”.
- Composite indicator (CI) score: 3.28 (CI cutoff for strong debt-carrying capacity is CI > 3.05).
- CI components contributions:
  - CPIA: 44 percent
  - International reserves: 30 percent
  - World growth: 14 percent
  - Remittances: 7 percent
  - Country real growth rate: 3 percent

### Debt sustainability analysis (DSA) results and stress tests
- External public debt (baseline):
  - The PV of PPG external debt-to-GDP ratio breaches its applicable threshold during 2020-24, signaling a high risk of external debt distress.
  - The PV of PPG external debt-to-exports ratio breaches its threshold in 2020.
  - Debt service-to-exports and debt service-to-revenue ratios increase through 2021-22 (when principal repayments to Caixa Geral de Depósitos begin) and decrease gradually from 2023 onward.
- External public debt (stress tests):
  - PV of PPG external debt-to-GDP ratio breaches its threshold protractedly under stress tests.
  - Under a one-time 30 percent nominal depreciation shock, PV of PPG external debt-to-GDP rises to 91.7 percent in 2021 before receding below the 55 percent threshold in 2029.
  - PV of PPG external debt-to-exports ratio exceeds its threshold during 2020–26, rising to 395.1 percent in 2022 and decreasing below the 240 percent threshold by 2027.
  - External debt service-to-export and external debt service-to-revenue ratios breach thresholds in 2022-24 and 2021-24 respectively.
  - Projected external debt burden indicators are vulnerable to an export growth shock and to a one-time depreciation shock, highlighting need for export diversification.
- Total public debt:
  - PV of total public debt-to-GDP ratio exceeds the 70 percent benchmark till 2027 under the baseline scenario.
  - The benchmark is also breached throughout the projection period under the six standardized bound tests and the tailored combined contingent liabilities test.
  - Debt outlook particularly vulnerable to contingent liabilities associated with SOEs’ debt and to a one-time depreciation (the most extreme shock).
  - Despite high public debt-to-GDP level, debt assessed as sustainable given high share of highly concessional external debt and moderate debt service ratios.
  - Roll-over risks from domestic public debt mitigated by maturity structure and around 40 percent of domestic debt held by the Social Security Fund.
- Debt distress ratings:
  - Risk of external debt distress: “high” under the baseline scenario.
  - Risk of overall debt distress: “high” under the baseline scenario (breach of PV of total public debt-to-GDP through 2027).
- DSSI and assumptions:
  - DSA assumes US$ 8.96 million of debt service due in 2020 for which agreements were secured will be reprofiled for 2021–24 under DSSI terms.
  - While May and June debt service were eligible for suspension, authorities paid these obligations while awaiting participation confirmation from creditors.

### Policy implications and recommendations
- Short-term policy needs:
  - Mobilize identified external financing, including debt service suspension under the DSSI and net domestic borrowing up to authorities’ annual ceiling of 3 percent of GDP.
  - Use multilateral and bilateral budget support expected through 2020-22 (US$168 million, 2.7 percent of GDP) to address immediate financing needs.
- Medium-term priorities:
  - Prudent borrowing policies, adhering to a zero limit on non-concessional external borrowing in the next few years.
  - Strengthened debt management strategy to stabilize future debt dynamics.
  - Fiscal consolidation supported by enhanced domestic revenue mobilization and strengthened expenditure management and prioritization.
  - Progress in restructuring of SOEs to improve the primary balance and reduce contingent liability risks.
  - Sustained implementation of growth-enhancing structural reforms focused on diversifying production and exports, improving inter-island connectivity, strengthening linkages between tourism and other sectors, and addressing critical infrastructure gaps.
  - Measures to develop the government securities market and lower costs of domestic borrowing.
  - Export diversification to reduce vulnerability to export shocks and exchange rate depreciation.

*Source: Cabo Verdean authorities and IMF staff estimates and projections as presented in the specified content unit.*

### 20.      The authorities agreed with the results of the DSA and stressed their concerns about the

### 20. The authorities agreed with the results of the DSA and stressed their concerns about the fragility of the Cabo Verdean economy.

### Key findings on economic fragility and pandemic impact
- The health crisis exposed structural challenges: the lack of diversification, heavy reliance on tourism, and vulnerability to exogenous shocks.
- The lack of natural resources and relatively limited fiscal space at the beginning of the health crisis made broad-based responses to the pandemic difficult and costly, involving numerous trade-offs.
- The authorities emphasized high uncertainties in macroeconomic assumptions and requested analytical tools from the IMF and the World Bank to inform debt management policy discussions.

### Authorities' commitments and policy intentions
- Reaffirmed commitment to fiscal consolidation and to the goal of a public debt-to-GDP ratio lower than 100 percent over the medium term.
- Indicated that pandemic developments have jeopardized progress toward that goal.
- Indicated continued commitment to prudent borrowing policies.
- Will work towards strengthening debt management practices and improving the functioning of the government securities market to enhance long-term debt sustainability.

### Stress tests and scenario analysis (high-level)
- The DSA includes External PPG MLT debt and Public DSA frameworks with Baseline, Historical scenario, Standardized Tests, Tailored Tests, and Most extreme shock presentations.
- Stress tests consider shocks such as One-time depreciation, Exports shock, Combined contingent liabilities, Natural Disasters, Commodity Prices, Market Financing, and Combined CLs.
- Note: "Most extreme shock" is defined as the test that yields the highest ratio in or before 2030; one-off breaches are presented when applicable and handled per DSA conventions.

### Selected debt dynamics and projections (exact figures from tables and charts)
- External debt (nominal) as percent of GDP: 2019 = 102.0; 2020 = 108.4; 2021 = 104.2; 2022 = 100.5; 2023 = 93.7; 2024 = 86.1; 2025 = 79.8; 2030 = 55.2; 2040 = 24.8.
- Of which: public and publicly guaranteed (PPG) external debt (percent of GDP): 2019 = 91.4; 2020 = 97.0; 2021 = 93.8; 2022 = 90.8; 2023 = 84.8; 2024 = 78.0; 2025 = 72.3; 2030 = 49.9; 2040 = 24.8.
- Change in external debt (percent of GDP): 2019 = -0.9; 2020 = 6.4; 2021 = -4.2; 2022 = -3.7; 2023 = -6.8; 2024 = -7.5; 2025 = -6.3; 2030 = -4.2; 2040 = -5.6.
- Identified net debt-creating flows (percent of GDP): 2019 = -5.1; 2020 = 20.7; 2021 = 2.0; 2022 = -2.0; 2023 = -5.3; 2024 = -7.3; 2025 = -7.2; 2030 = -6.4; 2040 = -4.5.
- Non-interest current account deficit (percent of GDP): 2019 = -2.5; 2020 = 11.9; 2021 = 6.7; 2022 = 3.8; 2023 = 1.6; 2024 = -0.2; 2025 = -0.4; 2030 = -1.3; 2040 = -0.6.
- Net FDI (negative = inflow, percent of GDP): 2019 = -4.0; 2020 = -0.8; 2021 = -2.8; 2022 = -3.7; 2023 = -4.0; 2024 = -4.3; 2025 = -4.0; 2030 = -4.0; 2040 = -3.8.
- Endogenous debt dynamics (percent of GDP): 2019 = 1.4; 2020 = 9.7; 2021 = -1.9; 2022 = -2.1; 2023 = -2.9; 2024 = -2.8; 2025 = -2.7; 2030 = -1.2; 2040 = -0.1.
- Residual (percent of GDP): 2019 = 4.2; 2020 = -14.3; 2021 = -6.2; 2022 = -1.7; 2023 = -1.5; 2024 = -0.2; 2025 = 0.9; 2030 = 2.3; 2040 = -1.1.
- Sustainability indicators:
  - PV of PPG external debt-to-GDP ratio: 2019 = 58.8; 2020 = 69.2; 2021 = 65.8; 2022 = 63.8; 2023 = 59.9; 2024 = 55.5; 2025 = 52.0; 2030 = 37.1; 2040 = 18.6.
  - PV of PPG external debt-to-exports ratio: 2019 = 116.1; 2020 = 244.3; 2021 = 194.8; 2022 = 170.9; 2023 = 149.0; 2024 = 129.4; 2025 = 116.4; 2030 = 72.8; 2040 = 30.6.
  - PPG debt service-to-exports ratio: 2019 = 7.0; 2020 = 12.5; 2021 = 13.4; 2022 = 13.7; 2023 = 12.4; 2024 = 11.0; 2025 = 9.6; 2030 = 7.3; 2040 = 4.0.
  - PPG debt service-to-revenue ratio: 2019 = 13.5; 2020 = 14.4; 2021 = 17.7; 2022 = 19.1; 2023 = 17.9; 2024 = 16.8; 2025 = 15.0; 2030 = 13.1; 2040 = 8.6.
- Gross external financing need (Million of U.S. dollars): 2019 = -35.4; 2020 = 301.9; 2021 = 204.5; 2022 = 148.1; 2023 = 95.3; 2024 = 40.9; 2025 = 31.8; 2030 = -13.5; 2040 = -83.4.

### Key macroeconomic assumptions (selected exact values)
- Real GDP growth (in percent): 2019 = 5.7; 2020 = -6.8; 2021 = 4.5; 2022 = 4.8; 2023 = 5.7; 2024 = 6.0; 2025 = 6.2; 2030 = 5.5; 2040 = 5.5.
- GDP deflator in US dollar terms (change in percent): 2019 = -4.6; 2020 = 1.2; 2021 = 6.0; 2022 = 2.1; 2023 = 1.8; 2024 = 1.6; 2025 = 1.7; 2030 = 1.8; 2040 = 2.4.
- Effective interest rate (percent): 2019 = 2.2; 2020 = 2.2; 2021 = 2.6; 2022 = 2.6; 2023 = 2.7; 2024 = 2.7; 2025 = 2.8; 2030 = 3.4; 2040 = 5.1.
- Growth of exports of G&S (US dollar terms, in percent): 2019 = 4.3; 2020 = -47.2; 2021 = 31.9; 2022 = 18.3; 2023 = 15.8; 2024 = 14.9; 2025 = 12.5; 2030 = 9.5; 2040 = 10.2.
- Government revenues (excluding grants, in percent of GDP): 2019 = 26.2; 2020 = 24.5; 2021 = 25.6; 2022 = 26.9; 2023 = 27.8; 2024 = 28.0; 2025 = 28.7; 2030 = 28.5; 2040 = 27.9.
- Nominal GDP (Million of US dollars): 2019 = 1,982; 2020 = 1,870; 2021 = 2,071; 2022 = 2,215; 2023 = 2,384; 2024 = 2,567; 2025 = 2,771; 2030 = 3,969; 2040 = 8,238.

### Public sector debt specifics (selected exact figures)
- Public sector debt (percent of GDP): 2019 = 125.0; 2020 = 137.5; 2021 = 134.8; 2022 = 130.0; 2023 = 122.8; 2024 = 114.9; 2025 = 106.3; 2026 = 98.9; 2027 = 91.8; 2028 = 85.2; 2029 = 78.8; 2030 = 73.0; 2040 = 29.8.
- Change in public sector debt (percent of GDP): 2019 = -0.6; 2020 = 12.5; 2021 = -2.7; 2022 = -4.8; 2023 = -7.2; 2024 = -7.9; 2025 = -8.6; 2026 = -7.5; 2027 = -7.0; 2028 = -6.7; 2029 = -6.3; 2030 = -5.8.
- PV of public debt-to-GDP ratio: 2019 = 92.4; 2020 = 107.7; 2021 = 106.5; 2022 = 102.9; 2023 = 97.9; 2024 = 92.4; 2025 = 86.0; 2026 = 80.4; 2027 = 75.0; 2028 = 69.8; 2029 = 64.8; 2030 = 60.2; 2040 = 23.6.
- Debt service-to-revenue and grants ratio (percent): 2019 = 26.9; 2020 = 31.4; 2021 = 39.6; 2022 = 45.6; 2023 = 47.1; 2024 = 47.6; 2025 = 49.2; 2026 = 50.7; 2027 = 48.5; 2028 = 45.4; 2029 = 41.3; 2030 = 38.2.

### Sensitivity analysis highlights (selected exact values)
- Table 3: PV of debt-to-GDP ratio (Baseline) 2020–2030: 69, 66, 64, 60, 55, 52, 49, 46, 43, 40, 37 (for 2020–2030 respectively).
- Table 4: Public debt (Baseline) 2020–2030: 108, 107, 103, 98, 92, 86, 80, 75, 70, 65, 60 (for 2020–2030 respectively).
- Bound tests and tailored tests present alternative paths; for example:
  - One-time 30 percent nominal depreciation (B6) increases PV of debt-to-GDP and public debt significantly in the short to medium term in the scenarios presented.

*Statement by Afonso Bevilaqua, Executive Director for Cabo Verde, Pedro Fachada, Alternate Executive Director, and Carla Cruz, Advisor to Executive Director; October 26, 2020.*

### 1.      On behalf of our Cabo Verdean authorities, we thank the country team led by Ms.

### On behalf of our Cabo Verdean authorities, we thank the country team led by Ms. Kabedi-Mbuyi

### Summary of recent developments
- GDP grew on average close to 5 percent between 2016 and 2019.
- Inflation remained low and stable prior to the pandemic.
- Fiscal consolidation had put both the fiscal deficit and the public debt on a declining trend before the pandemic.
- International reserves strengthened and poverty declined while social indicators improved in general.
- The COVID-19 pandemic hit Cabo Verde in March 2020, interrupting the above period of strong performance.

### COVID-19 health and epidemiological situation
- First imported cases identified in March on one of the most touristic islands.
- By mid-October, a total of 87 deaths have occurred and 7,800 cases have been recorded, with the majority in Santiago, the largest and most populous island.
- Adjusted for population, Cabo Verde remains one of the most affected countries in Sub-Saharan Africa.

### Economic impact and recent indicators
- GDP in the second quarter declined by 31.7 percent compared to the same quarter of 2019.
- Real GDP is projected to contract by 6.8 percent in 2020, compared to a pre-COVID estimate of a 5 percent expansion.
- Consumer and business confidence recorded the lowest level in many years in June.
- The current account deficit is projected to reach 14.2 percent of GDP in 2020, as compared to a small surplus in 2019; the reversal mainly reflects the collapse in tourism receipts and remittances, partially offset by a drop in imports.
- Gross international reserves are estimated by staff to decline to €573 million by end-2020, as compared to €663 million in 2019.
- Reserves are projected to remain at a comfortable level, equivalent to more than 7 months of prospective imports of goods and services.

### Policy responses to the COVID-19 crisis
- Immediate public health measures: declared state of emergency, social distancing guidelines, closed international borders, restricted inter-island travel, suspended non-essential activities.
- Fiscal and monetary measures prioritized saving lives and supporting vulnerable populations, including:
  - Expanded healthcare and social protection services.
  - Measures to support the informal economy and provide relief to companies.
  - Actions to ensure liquidity to the banking system and facilitate credit creation.
- In June, a revised 2020 budget reflected revenue declines and expansion of COVID-19 related spending.
- The overall fiscal deficit is now expected to reach 9.7 percent of GDP, compared to 1.7 percent of GDP estimated at the time of the first PCI review in March.
- COVID-19 expenditures are being fully disclosed on the Ministry of Finance official website and will be subject to audits in line with Cabo Verde’s legal framework.
- Banking system resilience: strengthened capital buffers and improved operational and risk management standards; legacy non-performing loans (NPLs) continued to decrease until the outbreak, and supervision is being enhanced.

### Policy Coordination Instrument (PCI) performance and medium-term policy priorities
- Despite the health crisis, performance under the PCI has remained strong:
  - The authorities met entirely or partially all reform targets for the second review.
  - They met all non-quantitative continuous targets and all quantitative targets for end-March 2020, except for the floor on tax revenues (missed by a small margin due to early COVID-19 impact).
- The authorities remain committed to the PCI objectives and aim to meet targets for the third and final review, scheduled to be completed at the beginning of 2021.
- Key medium-term objectives:
  - Enhance domestic revenue mobilization.
  - Strengthen expenditure management.
  - Advance SOEs reforms to support fiscal and public debt sustainability.
  - Improve the business environment and promote private sector development.

### Public debt, financing needs, and recovery considerations
- Public debt is projected to increase to 137.5 percent of GDP in 2020, compared to 118.1 percent of GDP estimated in the first PCI review.
- Before the crisis, the authorities envisaged a reduction in the public debt/GDP ratio to below 100 percent by 2024 through fiscal consolidation and growth-enhancing structural reforms.
- Exceptional financing needs imposed by the crisis have substantially increased public sector borrowing requirements in 2020.
- Over the medium-term, public debt is expected to resume a downward trend as economic recovery and fiscal consolidation restart, but it is expected to remain elevated through 2024 given the need to promote public investment and encourage economic diversification.

### Sovereign Private Investment Guarantee Fund (SPIGF) and SOE reform status
- A Strategy Note providing a conceptual framework for operationalizing the SPIGF was prepared by the authorities in April 2020.
- The SPIGF aims to support private sector investment by facilitating access to financing for capital-intensive projects.
- The Note and a posterior revision define the SPIGF operational framework and governance structure, with particular attention to potential contingent liabilities and implications for public debt.
- The authorities prepared a timeline to operationalize the SPIGF before the end of the year, in accordance with the legislation.
- The SOEs reforms program was delayed because of the health crisis; privatizations originally planned for 2020 were rescheduled due to pandemic constraints and retrenchment among potential investors.

### Risks, recovery outlook, and external support
- Major downside risk: uncertainty about the duration and trajectory of the pandemic.
- Upside possibility: potential for effective and accessible vaccines that could restore traveler confidence.
- Prolonged global slowdown would exacerbate negative impacts on tourism, remittances, and foreign investment, producing a stronger economic contraction and higher fiscal and balance of payments needs.
- Climate change and natural disasters remain important long-term downside risks.
- The authorities continue to value the PCI as a fundamental instrument to support their policy framework, structural reforms agenda, and to catalyze external financing.
- Debt relief agenda is a key element of the authorities’ strategy; given that Cabo Verde’s creditors are mainly multilateral institutions, IMF advocacy and engagement for potential debt relief negotiations would be extremely important.
- The authorities continue to count on international support to find the path back to debt sustainability and inclusive growth.

*Cabo Verde authorities' statement and assessment as presented in the IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1cpvea2020003.pdf_