## EXECUTIVE SUMMARY

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---

### Context
- The Cabo Verdean economy is in recession as a result of the economic impact of the pandemic that has shut down the tourism and transport sectors and significantly affected the rest of the economy.
- The number of COVID-19 cases continues to rise with concentration in the largest island, though the recovery rate is high.
- The economic outlook remains highly uncertain and dependent upon:
  - the duration of the pandemic,
  - the global economic recovery, and
  - the authorities’ ability to support the expected economic recovery through appropriate policies and reforms.
- Legislative and presidential elections are scheduled for April and October, respectively.
- Discussions were held remotely during January 25–February 8, 2021.
- Date on document: March 10, 2021.

### Program implementation and performance under the PCI
- The current Policy Coordination Instrument (PCI) is coming to an end.
- Program outcomes and compliance:
  - All end-September 2020 quantitative targets were met.
  - All non-quantitative continuous targets were observed.
  - All but two reform targets (RTs) under the program were met; progress has been made on the two missed RTs and authorities plan to complete them before the end of the year.
  - No accumulation of external or domestic payments arrears.
  - Net international reserves target was exceeded due to additional external financing.
  - Staff recommends completion of the third review under the Policy Coordination Instrument.
- Authorities have expressed interest in continued Fund engagement.

### Policy recommendations (key priorities)
- Health and fiscal priorities:
  - Focus on the health crisis by prioritizing spending.
  - Advance revenue-enhancing reforms.
  - Contain non-priority expenditures and fiscal risks.
  - Prioritize capital outlays.
  - Maintain prudent borrowing policies, relying on the zero limit on non-concessional loans to support medium-term fiscal and debt sustainability objectives.
- Monetary and financial sector:
  - Maintain the accommodative monetary policy stance in the absence of pressures on prices and reserves.
  - Improve AML/CFT framework further to maintain correspondent banking relationships (CBRs).
  - Enhance banking supervision, anticipate financial sector vulnerabilities, and take mitigating measures in relation with the economic impact of the pandemic.
- Structural reforms:
  - Accelerate structural reforms when conditions permit to support broad-based recovery and increase resilience to adverse shocks.

### Economic impact — selected findings and exact figures
- Real GDP:
  - Robust expansion in Q1 2020: 5.9 percent, y/y.
  - Contraction in real GDP estimated at 14 percent for 2020 (6.8 percent in the second PCI review).
- Inflation:
  - Declined to -0.9 percent at end-2020.
- Trade and services (end-September 2020, preliminary):
  - exports of goods declined by 50 percent,
  - imports of goods declined by 13 percent,
  - services (net) contracted by 72 percent.
- Reserves:
  - Gross international reserves reached €584 million (7.2 months of prospective imports of goods and services) at end-2020.
- Public finances and debt:
  - Government revenues declined by 23.8 percent in 2020.
  - In 2020, additional COVID-related expenditures in health, education, and social sectors amounted to CVE 2.8 billion (1.6 percent of GDP).
  - Total expenditures declined by 3.6 percent in 2020 due to a drop in capital outlays.
  - Overall deficit estimated at 8.9 percent of GDP (1.8 percent of GDP in 2019; 9.7 percent of GDP in the second PCI review).
  - Financing needs rose to 10 percent of GDP.
  - Public debt-to-GDP ratio increased to 140.9 percent (125 percent in 2019).
- Credit and relief measures:
  - Credit to the economy expanded by 4.4 percent at end-November 2020.
  - Temporary credit moratorium covered about 19 percent of credit to the economy at end-November.
  - IMF RCF: SDR 23.7 million (100 percent of quota).
  - Credit lines and guarantees supported more than 500 businesses, protecting about 12,300 jobs.
  - About CVE 3.9 billion of loans disbursed to the corporate sector through the special financing facility.
  - Suspension of employment contracts cost CVE 1.4 billion and helped safeguard jobs for some 32,000 workers.

### Fiscal framework, 2021 budget execution and key 2021 figures
- Authorities’ revised fiscal framework aims at narrowing the primary deficit from an estimated 6 percent of GDP in 2020 to 5.2 percent of GDP in 2021 (3.8 percent of GDP under the second PCI review).
- Key 2021 fiscal aggregates (authorities’ revised framework):
  - Revenues: 29.7 percent of GDP
  - Expenditures: 37.6 percent of GDP
  - Primary deficit: -5.2 percent of GDP (revised framework)
  - Primary deficit (2020 estimate): -6 percent of GDP
- 2021 headline budget execution support measures:
  - Monthly cashflow plans to align expenditure commitments with available resources.
  - Completion of the public investments portfolio review initiated in 2020.
  - Improvements in procurement processes; technical assistance from AFRITAC WEST 2.
- Key budget figures (selected, revised framework):
  - Primary balance (revised framework): -9,438 million CVE, -5.2 percent of GDP.
  - Overall balance (revised framework): -14,333 million CVE, -7.9 percent of GDP.
  - Financing needs (2021): 13,799 million CVE, 7.6 percent of GDP.
  - Public debt (percent of GDP) noted: 134.8 ... 138.6 (table entry).
- Financing composition (Text Table 3 — selected line items, millions CVE where indicated):
  - Total financing needs: 13,799.
  - Domestic Financing (Net) — Issuance of treasury securities: 2,800.
  - External financing (Net): 10,999.
  - Disbursements: 17,414.
  - Budget support: 4,223.
  - World Bank: 2,034.
  - African Development Bank: 2,189.
  - Program and project loans: 10,336.
  - Exceptional financing (DSSI): 2,255.
  - Amortization: 6,415.
- Contingency measures:
  - Contingency expenditures amounting to CVE 2.1 billion (1 percent of GDP).
  - Domestic financing constrained by law to issuance of government securities capped at 3 percent of GDP.
  - Authorities will curtail expenditures as needed to offset revenue shortfalls.

### Medium-term outlook and key projections (baseline)
- Real GDP growth projected at 5.8 percent for 2021 (4.5 percent in the second PCI review).
- Real GDP growth projected at about 6 percent over the medium term.
- Inflation expected to remain below 2 percent, in line with the euro area average.
- Current account deficit projected to narrow to 10.6 percent of GDP in 2021 and improve to 2.6 percent of GDP by 2026.
- Gross international reserves projected to be around 6 months of prospective imports of goods and services over the medium term.
- Preconditions to achieve baseline:
  - Favorable developments in the global economy.
  - Resumption and gradual increase of tourism and capital flows to Cabo Verde.
  - Acceleration of structural reforms to restructure SOEs and ease access to finance, particularly for SMEs.
- Authorities’ medium-term commitments:
  - Return to pre-pandemic fiscal and public debt trajectories and goal of bringing public debt below 100 percent of GDP in the medium term.
  - Primary balance projected to improve to a surplus in 2023 and reach 2.4 percent of GDP by 2026.
  - Public debt ratio projected to decline from 140.9 percent in 2020 to 98.9 percent in 2026, contingent on decisive revenue measures from 2022 and administrative efficiency gains.

### Downside and upside risks
- Principal downside risk: a prolonged pandemic with significant global and domestic impact.
- Adverse scenario (Annex I) quantified implications for 2021:
  - Real GDP growth would be limited to 3 percent.
  - Fiscal financing needs would increase to 10 percent of GDP.
  - A larger reserve drawdown would be needed, requiring additional fiscal adjustment and budget support compared to the baseline.
- Other downside risks: weather-related shocks, lack of momentum in structural reforms, weak fiscal consolidation efforts after the pandemic.
- Upside risk: faster and stronger resumption of tourism and capital flows.
- Authorities agreed with staff’s assessment and affirmed commitment to implementing needed policies and reforms; noted pandemic-triggered challenges and vulnerabilities likely to linger for the next two years.

### Monetary policy, external sector and reserves
- Monetary policy stance judged appropriate by staff; accommodative measures in 2020 included:
  - Lowering the policy rate by 125 basis points to 0.25 percent.
  - Reduction in minimum reserve requirements from 13 to 10 percent.
  - Reduction in overnight deposit rate by 5 basis points to 0.05 percent.
  - Setting up a long-term financing facility for banks; measures extended to end-December 2021.
- Exchange regime: conventional fixed peg to the euro (CVE 110.265 per euro).
- Reserve adequacy:
  - Optimal reserves level per IMF LIC/MIC framework: 3.3 months of prospective imports of goods and services.
  - Actual level: 9 months (end-2019).
  - Projected level: close to 6 months in the medium term.
- Staff stressed need for higher reserves than implied by IMF MIC/LIC framework due to small size, undiversified production base, and vulnerability to exogenous shocks; authorities agreed to advance reforms to improve business environment and rebuild external buffers.

### Financial sector soundness and supervisory actions
- Financial sector described as stable, adequately capitalized, and liquid.
- Key indicators (end-September 2020):
  - Regulatory capital to risk weighted assets (CAR): well-above the regulatory minimum of 12 percent.
  - Return on equity: 12.7 percent.
  - Non-performing loans (NPLs): 10.5 percent of total loans (slight increase from 10.1 percent at end-March).
- BCV actions and staff recommendations:
  - Enhanced monitoring of banking system in relation to COVID-19 relief measures (risk management, lending practices, reporting of NPLs).
  - Staff warned the end of the credit moratorium could cause a spike in NPLs, asset quality erosion, and solvency pressures; urged continued enhancement of banking supervision and a comprehensive study of loan losses and provisions when conditions permit.
  - Authorities committed to improving AML/CFT framework to preserve correspondent banking relationships; 2021 focus on implementing EU recommendations on combating cybercrimes.
  - Priority reforms include implementing recommendations from the latest asset-quality review (2015), enhancing risk-based supervision, deepening financial intermediation, and establishing a functional central registry for mobile collateral (to be completed by end-May).

### Structural reforms and SOE agenda
- Accelerating structural reforms is a key post-pandemic priority to support recovery, enhance medium-term growth prospects, and reduce fiscal risks.
- Key priority areas:
  - Restructuring state-owned enterprises (SOEs), monitor their financial situation, prepare a report on contingent liabilities and budget implications.
  - Facilitate access to finance, particularly for small and medium-sized enterprises.
  - Improve the business environment.
- Specific items and progress:
  - Sovereign Private Investment Guarantee Fund (SPIGF): Board appointed; plan to capitalize the Fund with resources at the central bank of Portugal by end-March as set by parliament; operationalization to proceed according to principles in the April 2020 Concept Note prepared under the PCI.
  - Next generation of structural reforms to be presented in PEDS II (2022-2026), a five-year strategy based on "Cabo Verde Ambition 2030".

### Annex I — Adverse scenario (summary and implications)
- Scenario description:
  - More severe COVID-19 shock in 2021 with more gradual global recovery and intensified domestic spread, leading to weaker domestic demand, tourism flows, transport services, and FDI.
- Macroeconomic impacts (selected):
  - Real GDP growth (percent):
    - Baseline: 2020 -14.0, 2021 5.8, 2022 6.0.
    - Adverse: 2020 -14.0, 2021 3.0, 2022 4.9.
  - Gross international reserves (millions of euros):
    - Baseline: 2020 583.9, 2021 586.6, 2022 587.1.
    - Adverse: 2020 583.9, 2021 526.7, 2022 424.8.
  - Gross reserves (months of prospective imports of goods and services):
    - Baseline: 2020 7.2, 2021 6.7, 2022 6.3.
    - Adverse: 2020 7.2, 2021 6.2, 2022 4.9.
- Fiscal and external outcomes (adverse scenario):
  - Fiscal deficit would increase to 10.4 percent of GDP in 2021 (absent additional consolidation).
  - Financing needs would increase to 10 percent of GDP.
  - Public debt would rise to 143.6 percent of GDP at end-2021 before declining to 107.8 percent of GDP at end-2026, some 9 percentage points higher than under the baseline scenario.
  - Current account deficit would remain elevated at 13.3 percent of GDP in 2021 (compared with narrowing to 10.6 percent under baseline).
- Policy implications and recommendations in adverse scenario:
  - Emphasize contingency planning, credible fiscal consolidation, increased external financing, and continued structural reforms.
  - Fiscal policy priorities: reduce non-priority spending; reduce domestically-financed investment other than counterpart funds for priority externally-financed investments; aim to contain the fiscal deficit at about 8 percent of GDP.
  - Financing recommendations: source additional concessional financing from development partners; a Fund financing arrangement could help provide resources while playing a catalytic role.
  - Structural reform priorities: accelerate structural reforms to support recovery and progress towards pre-pandemic medium-term trajectories.

### Program monitoring, TMU and reporting
- Program monitoring framework includes quantitative targets, continuous non-quantitative targets, and reform targets as specified in the Technical Memorandum of Understanding (TMU).
- Selected TMU rules and reporting requirements:
  - Primary balance measured as cumulative flow over the calendar year; revenues recorded when funds transferred to a government revenue account; primary expenditure recorded on a cash basis.
  - Concessionality defined as grant element of at least 35 percent; unified discount rate of 5 percent used for present value calculations.
  - Reporting timelines: monthly data for central government primary balance, tax revenues, net other liabilities (lag no more than six weeks); BCV to transmit NIR table monthly with a maximum delay of four weeks; quarterly and annual reporting requirements specified.

*Source: IMF staff report — EXECUTIVE SUMMARY (Cabo Verde), March 10, 2021.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- The Cabo Verdean economy is in recession as a result of the economic impact of the pandemic that has shut down the tourism and transport sectors and significantly affected the rest of the economy.
- The number of COVID-19 cases continues to rise with concentration in the largest island, though the recovery rate is high.
- The economic outlook remains highly uncertain and dependent upon:
  - the duration of the pandemic,
  - the global economic recovery, and
  - the authorities’ ability to support the expected economic recovery through appropriate policies and reforms.
- Legislative and presidential elections are scheduled for April and October, respectively.
- Discussions were held remotely during January 25–February 8, 2021. The staff team comprised Ms. Kabedi-Mbuyi (Head), Messrs. Amo-Yartey, Darius, Picca, and Ms. Iyer (all AFR). Ms. Cruz and Mr. Velloso (both OED) participated; Mr. Bevilaqua (Executive Director for Cabo Verde) joined the concluding meeting. The team held discussions with Deputy Prime Minister and Minister of Finance, Olavo Correia; the Central Bank Governor Óscar Santos; other senior officials; development partners; and the private sector.
- Date on document: March 10, 2021.

### Program Implementation
- The current Policy Coordination Instrument (PCI) is coming to an end.
- Despite the adverse impact of the pandemic, important gains were made under the PCI:
  - All end-September 2020 quantitative targets were met.
  - All non-quantitative continuous targets were observed.
  - All but two reform targets (RTs) under the program were met.
  - Progress has been made on the two missed RTs; the authorities plan to complete them before the end of the year.
- Staff recommends completion of the third review under the Policy Coordination Instrument.
- The authorities have expressed interest in continued Fund engagement.

### Policy Recommendations
- Focus on the health crisis by prioritizing spending:
  - Advance revenue-enhancing reforms.
  - Contain non-priority expenditures and fiscal risks.
  - Prioritize capital outlays.
  - Maintain prudent borrowing policies, relying on the zero limit on non-concessional loans to support medium-term fiscal and debt sustainability objectives.
- Maintain the accommodative monetary policy stance in the absence of pressures on prices and reserves.
  - Improve AML/CFT framework further to maintain correspondent banking relationships (CBRs).
- Enhance banking supervision, anticipate financial sector vulnerabilities, and take mitigating measures in relation with the economic impact of the pandemic.
- Accelerate structural reforms when conditions permit to support broad-based recovery and increase resilience to adverse shocks.

### Background and Recent Developments
- The PCI, approved by the Executive Board on July 15, 2019, aimed to enhance macroeconomic stability and supported:
  - fiscal and debt sustainability objectives,
  - the Strategic Plan for Sustainable Development (PEDS),
  - decisive structural reforms.
- Pre-COVID performance included increasing growth, low inflation, improved fiscal and external positions, declining public debt-to-GDP ratio, and reforms that delivered a strong performance before the health crisis.
- COVID-19 developments:
  - Total reported cases rose from 2,451 at end-July 2020 to 15,400 at end-February 2021, concentrated in Santiago.
  - Recovery rate remains high; hospitalizations are limited. Authorities plan to initiate vaccination in the next few weeks with external financing, notably from the World Bank.

### Economic Impact (Selected Findings and Exact Figures)
- Real GDP:
  - Robust expansion in Q1 2020: 5.9 percent, y/y.
  - Sharp contraction in Q2 and Q3 2020.
  - Contraction in real GDP estimated at 14 percent for 2020 (6.8 percent in the second PCI review).
- Inflation:
  - Declined to -0.9 percent at end-2020.
- Trade and services:
  - At end-September 2020, preliminary data indicate:
    - exports of goods declined by 50 percent,
    - imports of goods declined by 13 percent,
    - services (net) contracted by 72 percent.
- Reserves:
  - Gross international reserves reached €584 million (7.2 months of prospective imports of goods and services) at end-2020.
- Public finances and debt:
  - Government revenues declined by 23.8 percent in 2020.
  - In 2020, additional COVID-related expenditures in health, education, and social sectors amounted to CVE 2.8 billion (1.6 percent of GDP).
  - Total expenditures declined by 3.6 percent in 2020 due to a drop in capital outlays.
  - Overall deficit estimated at 8.9 percent of GDP (1.8 percent of GDP in 2019; 9.7 percent of GDP in the second PCI review).
  - Financing needs rose to 10 percent of GDP.
  - Public debt-to-GDP ratio increased to 140.9 percent (125 percent in 2019).
- Credit to the economy:
  - Expanded by 4.4 percent at end-November 2020.
  - Temporary credit moratorium covered about 19 percent of credit to the economy at end-November.
- Text Table 1 (Statement of Operations of the Central Government, Millions of Cabo Verde escudos):
  - Revenue: 2018 = 51,857; 2019 = 57,389; 2020 = 43,751; Change (2020/2019) = -23.8 percent.
  - Tax: 2018 = 40,657; 2019 = 42,013; 2020 = 32,237; Change = -23.3 percent.
    - Taxes on income and profit: 2018 = 12,253; 2019 = 12,672; 2020 = 9,779; Change = -22.8 percent.
    - Taxes on goods and services: 2018 = 19,887; 2019 = 20,658; 2020 = 15,196; Change = -26.4 percent.
    - Taxes on international trade: 2018 = 7,733; 2019 = 8,011; 2020 = 6,593; Change = -17.7 percent.
  - Grants: 2018 = 2,575; 2019 = 6,238; 2020 = 5,224; Change = -16.3 percent.
  - Other revenues: 2018 = 8,625; 2019 = 9,137; 2020 = 6,291; Change = -31.2 percent.
  - Expenditure: 2018 = 56,726; 2019 = 60,974; 2020 = 58,776; Change = -3.6 percent.
  - Expense: 2018 = 48,587; 2019 = 53,343; 2020 = 54,284; Change = 1.8 percent.
    - Of which COVID-related expenditures: 2020 = 2,773 (figure reported as “Of which COVID-related expenditures......2,773...”).
  - Net acquisition of nonfinancial assets: 2018 = 8,140; 2019 = 7,631; 2020 = 4,492; Change = -41.1 percent.
  - Primary balance: 2018 = -143; 2019 = 1,406; 2020 = -10,216.
  - Overall balance: 2018 = -4,869; 2019 = -3,585; 2020 = -15,024.
  - Net other liabilities: 2018 = -1,903; 2019 = -6,393; 2020 = -1,832.
  - Financing needs: 2018 = 6,772; 2019 = 9,978; 2020 = 16,857.
  - Note: Table includes budgetary central government (BCG) and extra budgetary central government (ECG), but excludes social security funds.
- COVID response support and outcomes:
  - IMF RCF: SDR 23.7 million (100 percent of quota).
  - Credit lines and guarantees supported more than 500 businesses, protecting about 12,300 jobs.
  - About CVE 3.9 billion of loans disbursed to the corporate sector through the special financing facility.
  - Suspension of employment contracts cost CVE 1.4 billion and helped safeguard jobs for some 32,000 workers.

### Performance Under the Program
- Program performance was satisfactory despite the COVID shock:
  - All end-September 2020 quantitative targets were met; notably the primary balance target was met with a wide margin due to the under-execution of capital expenditures.
  - Net other liabilities were below the program ceiling owing to larger-than-projected repayments and slower execution of capitalization operations.
  - No accumulation of external or domestic payments arrears.
  - The target on the nominal level of new concessional external debt of the central government was met.
  - Net international reserves target was exceeded due to additional external financing.
  - All non-quantitative continuous targets were met.
  - All but two RTs were observed at the time of the second program review; the two missed RTs (streamlining of exemptions on VAT and excises—RT for end-December 2020; creation of a functional central registry of mobile collateral—RT for mid-January 2021) are expected to be completed before end-2021.

### Outlook and Risks
- Baseline scenario projections and key numbers:
  - Real GDP growth projected at 5.8 percent for 2021 (4.5 percent in the second PCI review).
  - Real GDP growth projected at about 6 percent over the medium term.
  - Inflation expected to remain below 2 percent, in line with the euro area average.
  - Current account deficit projected to narrow to 10.6 percent of GDP in 2021 and improve to 2.6 percent of GDP by 2026.
  - Gross international reserves projected to be around 6 months of prospective imports of goods and services over the medium term.
- Preconditions to achieve baseline:
  - Favorable developments in the global economy.
  - Resumption and gradual increase of tourism and capital flows to Cabo Verde.
  - Execution of large externally-financed infrastructure projects delayed by the pandemic (water and sanitation plant in Santiago; ship terminal in São Vicente; port of Maio).
  - Acceleration of structural reforms to restructure SOEs and ease access to finance, particularly for SMEs.
- Downside risks (principal and quantified adverse scenario):
  - A prolonged pandemic with significant global and domestic impact is the most important downside risk.
  - In the adverse scenario for 2021:
    - Real GDP growth would be limited to 3 percent (Annex I).
    - Fiscal financing needs would increase to 10 percent of GDP.
    - A larger reserve drawdown would be needed, requiring additional fiscal adjustment and budget support compared to the baseline.
  - Other downside risks: weather-related shocks, lack of momentum in structural reforms, weak fiscal consolidation efforts after the pandemic.
- Upside risk: faster and stronger resumption of tourism and capital flows.
- The authorities agreed with staff’s assessment and the downside risks, and reaffirmed commitment to implementing needed policies and reforms. They stressed that pandemic-triggered challenges and vulnerabilities are likely to linger for the next two years.

### Policy Discussions (Introductory Points)
- Fiscal Policy and Public Debt Sustainability: discussed as critical in sections marked A, with emphasis on fiscal consolidation, prioritization, and debt sustainability.
- Monetary Policy: maintain accommodative stance absent pressures on prices and reserves; improve AML/CFT to preserve CBRs.
- Financial Sector Issues: enhance supervision and anticipate vulnerabilities; mitigate pandemic impacts.
- Structural Reforms: accelerate when feasible to support recovery and resilience.
- Program Modalities and Staff Appraisal are covered in subsequent sections.

*Source: IMF staff report — EXECUTIVE SUMMARY (Cabo Verde), March 10, 2021.*

### 8.      Staff stressed that budget execution will continue to face challenges in 2021 (PS ¶19,

### 8. Staff stressed that budget execution will continue to face challenges in 2021 (PS ¶19, 20, Text Table 2)

### Fiscal framework and budget execution
- Staff highlighted ongoing uncertainties expected to impact revenue collection and noted that coverage of COVID-related expenses remains a priority.
- Authorities agreed that 2021 budget execution should be underpinned by a fiscal framework targeting a narrowing of the primary deficit from an estimated 6 percent of GDP in 2020 to 5.2 percent of GDP (3.8 percent of GDP under the second PCI review).
- Key 2021 fiscal aggregates (authorities’ revised framework):
  - Revenues: 29.7 percent of GDP
  - Expenditures: 37.6 percent of GDP
  - Primary deficit: -5.2 percent of GDP (revised framework)
  - Primary deficit (2020 estimate): -6 percent of GDP
- Revenue-side assumptions to support collections:
  - Projected increase in economic activity
  - Entry into force of the 2019 reform instituting a 5 percent tariff on imports previously exempted
  - Continued implementation of reforms to increase administrative efficiency and tax compliance (inspections, audits, improved risk management)
- Expenditure-side assumptions:
  - Continued restraint of current spending
  - Rationalization of capital outlays
  - Capital outlays projected at 6.4 percent of GDP in 2021, higher than at time of second PCI review (5.2 percent of GDP), reflecting mostly a base effect and acceleration of priority externally-financed investment projects delayed by the pandemic in 2020
- Budget execution support measures:
  - Monthly cashflow plans to align expenditure commitments with available resources
  - Completion of the public investments portfolio review initiated in 2020
  - Improvements in procurement processes, particularly for domestically financed projects, including enhancements to the IT system for online dissemination of public procurement contract information
  - Technical assistance on public investment management from AFRITAC WEST 2

### Key budget figures and balances (selected)
- Primary balance (revised framework): -9,438 million CVE, -5.2 percent of GDP
- Overall balance (revised framework): -14,333 million CVE, -7.9 percent of GDP
- Financing needs (2021): 13,799 million CVE, 7.6 percent of GDP
- Public debt (percent of GDP) noted: 134.8 ... 138.6 (table entry)

### Financing and contingency measures
- The 2021 fiscal framework is fully financed.
- Domestic financing constrained by law to issuance of government securities capped at 3 percent of GDP.
- External financing includes loans and grants from the World Bank, the African Development Bank, bilateral partners, and debt service suspension under the G-20 Initiative.
- Authorities identified contingency expenditures amounting to CVE 2.1 billion (1 percent of GDP). These expenditures (some goods and services outlays, travel, publicity, transfers to political parties, domestically financed investment, excluding counterpart funds) will not be committed if some revenues are not collected.
- Authorities will curtail expenditures as needed to offset revenue shortfalls.

### Sources of financing for 2021 (Text Table 3 — selected line items)
- Total financing needs: 13,799
- Financing sources: 13,799
- Domestic Financing (Net) — Issuance of treasury securities: 2,800
- External financing (Net): 10,999
- Disbursements: 17,414
- Budget support: 4,223
- World Bank: 2,034
- African Development Bank: 2,189
- Program and project loans: 10,336
- JICA: 6,375
- OFID: 870
- World Bank (additional line): 955
- BADEA: 459
- Other: 1,677
- Onlending loans: 600
- African Development Bank (onlending): 579
- Other (onlending): 21
- Exceptional financing (DSSI): 2,255
- Amortization: 6,415

### Medium-term outlook and debt sustainability
- For 2022:
  - Primary deficit projected to narrow from 5.2 percent of GDP in 2021 to 0.7 percent of GDP in 2022 as revenue performance strengthens and expenditures decline.
  - Tax and non-tax revenues projected to increase from 27.5 percent of GDP in 2021 to 28.8 percent of GDP in 2022 through measures including introduction of ECOWAS Common External Tariffs (postponed earlier), streamlining of tax exemptions on excises and VAT, electronic invoicing, enhanced customs controls, collection of tax arrears, and improved monitoring of VAT payments.
  - Expenditures projected at 34.6 percent of GDP in 2022 (37.6 percent of GDP in 2021).
  - Priority social spending stabilizing at 9 percent of GDP.
  - Capital outlays declining to 4.2 percent of GDP in 2022 (6.4 percent of GDP in 2021).
  - Financing needs projected to decline from 7.6 percent of GDP in 2021 to 3.8 percent of GDP in 2022, keeping domestic financing below 1 percent of GDP.
- Authorities’ medium-term commitments:
  - Return to pre-pandemic fiscal and public debt trajectories and goal of bringing public debt below 100 percent of GDP in the medium term.
  - Primary balance projected to improve to a surplus in 2023 and reach 2.4 percent of GDP by 2026.
  - Public debt ratio projected to decline from 140.9 percent in 2020 to 98.9 percent in 2026, contingent on decisive revenue measures from 2022 and reforms to increase administrative efficiency gains, alongside restraint on non-priority expenditures.
- Debt distress assessment:
  - Cabo Verde’s risk of debt distress is high, though public debt is assessed as sustainable.
  - The last joint World Bank/IMF Debt Sustainability Analysis showed high risk of external and total debt distress but public debt sustainable due to manageable debt service and largely concessional debt.
  - Debt sustainability depends on rebound in economic activity in 2021, resumption of fiscal consolidation and structural reforms, and continued reliance on concessional borrowing.
  - Annex I scenario: if adverse scenario materializes, fiscal adjustment measures would need to be complemented with additional concessional financing; absent both, debt dynamics would significantly deteriorate relative to the baseline.

### COVID-related transparency and governance
- Authorities reiterated commitment to transparency and governance for execution of COVID-related spending:
  - COVID-related expenditures continue to be monitored and tracked regularly.
  - Execution reports are published on the official website of the Ministry of Finance.
  - These expenditures will be audited along with the 2020 budget once annual financial accounts are finalized.
- Debt relief under G-20 Initiative (DSSI):
  - Participating creditors granted US$ 15.5 million of debt service suspension in 2020.
  - Under the DSSI extension to end-June 2021, authorities expect to receive US$ 24.9 million.

### Monetary policy and external sector
- Monetary policy stance judged appropriate by staff.
- 2020 accommodative measures to support pandemic response included:
  - Lowering the policy rate by 125 basis points to 0.25 percent
  - Reduction in minimum reserve requirements from 13 to 10 percent
  - Reduction in overnight deposit rate by 5 basis points to 0.05 percent
  - Setting up a long-term financing facility for banks
  - Measures extended to end-December 2021
- Exchange regime: conventional fixed peg to the euro (CVE 110.265 per euro).
- Reserve adequacy:
  - Optimal reserves level per IMF LIC/MIC framework: 3.3 months of prospective imports of goods and services
  - Actual level: 9 months (end-2019)
  - Projected level: close to 6 months in the medium term
- Staff stressed need for higher reserves than implied by IMF MIC/LIC framework due to small size, undiversified production base, and vulnerability to exogenous shocks; authorities agreed to advance reforms to improve business environment and rebuild external buffers.

### Financial sector stability and supervision
- Financial sector described as stable, adequately capitalized, and liquid.
- Key indicators (end-September 2020):
  - Regulatory capital to risk weighted assets (CAR): well-above the regulatory minimum of 12 percent
  - Return on equity: 12.7 percent
  - Non-performing loans (NPLs): 10.5 percent of total loans (slight increase from 10.1 percent at end-March)
- BCV actions and staff recommendations:
  - Enhanced monitoring of banking system in relation to COVID-19 relief measures (risk management, lending practices, reporting of NPLs)
  - Staff warned that the end of the credit moratorium could cause a spike in NPLs, asset quality erosion, and solvency pressures; urged continued enhancement of banking supervision and a comprehensive study of loan losses and provisions when conditions permit
  - Authorities committed to improving AML/CFT framework to preserve correspondent banking relationships; 2021 focus on implementing EU recommendations on combating cybercrimes
  - Priority reforms: implement recommendations from the latest asset-quality review (2015), enhance risk-based supervision, deepen financial intermediation, and establish a functional central registry for mobile collateral (to be completed by end-May)

### Structural reforms
- Accelerating the pace of structural reforms is a key post-pandemic priority to support recovery, enhance medium-term growth prospects, and reduce fiscal risks.
- Key priority areas:
  - Restructuring state-owned enterprises (SOEs), monitor their financial situation, prepare a report on contingent liabilities and budget implications
  - Facilitate access to finance, particularly for small and medium-sized enterprises
  - Improve the business environment
- Specific items:
  - No direct financial support to SOEs in 2020 other than access to COVID relief measures; same for the airline where the State holds 39 percent of shares
  - Sovereign Private Investment Guarantee Fund (SPIGF):
    - Board of Directors appointed
    - Plan to capitalize the Fund with resources at the central bank of Portugal by end-March as set by parliament
    - Operationalization to proceed according to principles in the April 2020 Concept Note prepared under the PCI
  - Next generation of structural reforms to be presented in PEDS II (2022-2026), a five-year strategy based on the long-term development plan "Cabo Verde Ambition 2030" to be presented for parliament’s endorsement this year

### Program modalities and staff appraisal
- Objectives under the PCI reaffirmed; authorities committed to policies and reforms consistent with third PCI review understandings and expressed interest in continued engagement with the Fund.
- Capacity to repay the Fund assessed as adequate:
  - Outstanding Fund credit projected at 1.8 percent of exports of goods and services and 2.8 percent of gross international reserves at end-2026
- A safeguard assessment will be conducted in connection with the RCF approved in April 2020 and ideally completed before approval of a new financing arrangement.
- Staff appraisal:
  - COVID-19 shock stronger than anticipated; outlook subject to uncertainties and downside risks
  - Authorities urged to prepare mitigating measures against downside risks and, after the crisis, to sustain policies for macroeconomic stability and accelerate growth-enhancing structural reforms to return to pre-pandemic medium-term trajectories

*Sources: Cabo Verdean authorities and IMF staff projections.*

### 29.      Budget execution  will need to be carefully monitored. The uncertain economic outlook

### 29.      Budget execution  will need to be carefully monitored. The uncertain economic outlook

### Fiscal risks and budget execution
- The uncertain economic outlook and downside risks are likely to generate challenges for the government budget in 2021.
- Staff urges the authorities to use available budget management tools to align expenditure commitments with resources to avoid an accumulation of payments arrears.
- COVID-19 relief measures should continue to be monitored closely and phased out when conditions permit.
- Staff welcomes expenditures contingency measures identified by the authorities but emphasizes continued enhancement of revenue mobilization through tax administration reforms.

### Transparency and accountability for COVID-19 spending
- Transparency and accountability in the execution of COVID-19 related expenditures remain critical.
- Continued publication of these expenses on the authorities’ official website is welcomed by staff.
- The commitment to audit them along with the 2020 budget is noted.
- Information on related contracts is available to the public, on request at the Ministry of Finance.

### Medium-term fiscal and debt sustainability
- The authorities’ resolve to maintain the focus on medium-term fiscal and debt sustainability objectives is welcome.
- Revenue-side priorities:
  - Sustained implementation of measures to broaden the tax base.
  - Increase the tax compliance rate.
  - Improve efficiency in customs control.
  - Overhaul exemptions.
- Expenditure-side priorities:
  - Continue restraining non-priority outlays.
  - Enhance efficiency in capital expenditure management.
- Debt assessment and risks:
  - Cabo Verde is at a   high risk of debt distress, though public debt is assessed as sustainable.
  - Debt sustainability is subject to important downside risks, notably from a more severe and prolonged impact of the pandemic.
- Policy implications:
  - Fiscal consolidation is critically important to improve debt dynamics.
  - Progress in structural reforms to restructure SOEs and enhance broad-based growth prospects is needed.
  - Continued reliance on concessional borrowing remains critically important.

### Monetary policy and financial sector vigilance
- The current accommodative monetary policy stance is appropriate.
- Measures taken by the authorities in response to the pandemic have helped support liquidity in the banking system and credit expansion.
- Staff encourages the BCV to anticipate vulnerabilities in the financial system and stand ready to take corrective measures to protect the credibility of the peg, should pressures arise on prices or reserves.

### External sector assessment and reserve adequacy
- Results from the external sector assessment show that Cabo Verde’s external position in 2020 was substantially stronger than suggested by fundamentals and desirable policy settings, pointing to an undervaluation.
- Cabo Verde’s high and negative net international investment position is a source of vulnerability, though risks are partly contained by the structure of external liabilities which are dominated by foreign direct investment and long-term maturity debt.
- Reserve adequacy:
  - Assessed as satisfactory based on the IMF LIC/MIC framework that indicates an optimal reserve level of 3.3 months of prospective imports of goods and services.
  - Staff stresses that fragilities arising from the economy’s small size, lack of diversification and vulnerability to exogenous shocks indicate that a higher level of reserves is desirable.
  - The BCV should continue to seize all opportunities to rebuild external buffers eroded by the economic impact of the pandemic.

### Program performance and policy support
- The authorities have maintained a strong performance under the program despite challenging circumstances.
- All quantitative and continuous non-quantitative targets for the third review were met.
- All reform targets under the program were observed, except for two measures that the authorities plan to complete before the end of the year.
- Based on the program performance, and in view of the authorities’ commitment to medium-term objectives under the PCI as presented in their Program Statement, staff supports the completion of the third review under the Policy Coordination Instrument.

*Source: IMF country report excerpt (paragraphs 29–34).*

### 35.      Staff proposes that, upon the completion of this last review under the PCI, Article IV

### 35. Staff proposes that, upon the completion of this last review under the PCI, Article IV consultation with Cabo Verde be held on a 24-month cycle.

### Recommendation on Article IV consultation cycle
- Staff proposes that, upon the completion of this last review under the PCI, Article IV consultation with Cabo Verde be held on a 24-month cycle.

### Recent economic developments and macro outcome highlights
- Real GDP: contraction of -14.0 in 2020 (Table 1).
- GDP recovery projections: 2021 proj. 4.5; 2022 proj. 5.8; 2023 proj. 6.0; 2024 proj. 6.0; 2025 proj. 6.1; 2026 proj. 6.2 (Table 1).
- GDP deflator: 1.5 (2018), 0.6 (2019), 1.1 (2020), 0.9 (2021), 1.2 (2022), 1.2 (2023), 1.4 (2024), 1.5 (2025), 1.6 (2026), 1.8 (2027), 1.9 (2028) — values as presented in Table 1.
- Consumer price index (annual average): 1.3 (2018), 1.1 (2019), 1.0 (2020), 0.6 (2021), 1.2 (2022), 1.2 (2023), 1.4 (2024), 1.5 (2025), 1.6 (2026), 1.7 (2027), 1.7 (2028) (Table 1).
- Headline inflation declined in 2020 reflecting weak domestic demand and lower international oil prices (Figure 1 caption).

### External sector developments and vulnerabilities
- Exports of goods and services: 15.9 (2018); 10.0 (2019); -47.3 (2020); -48.9 (2021); 25.9 (2022); 33.8 (2023); 18.6 (2024); 11.0 (2025); 11.8 (2026); 11.6 (2027); 9.1 (2028) (Table 1).
- Tourism (component of exports): 10.0 (2018); 8.6 (2019); -65.7 (2020); -64.3 (2021); 32.5 (2022); 36.4 (2023); 28.1 (2024); 16.5 (2025); 17.4 (2026); 9.3 (2027); 9.9 (2028) (Table 1).
- Imports of goods and services: 8.7 (2018); 2.0 (2019); -21.5 (2020); -23.7 (2021); 5.1 (2022); 11.2 (2023); 7.6 (2024); 5.5 (2025); 6.4 (2026); 9.4 (2027); 6.3 (2028) (Table 1).
- Current account (including official transfers, percent of GDP): -5.2 (2018); -0.4 (2019); -14.2 (2020); -13.8 (2021); -9.2 (2022); -10.6 (2023); -6.4 (2024); -4.7 (2025); -3.3 (2026); -2.8 (2027); -2.6 (2028) (Table 1).
- Remittances increased in 2020 and remained an important source of foreign currency supporting reserves (Figure 2 captions).
- Gross international reserves (months of prospective imports of goods and services): 5.5 (2018); 9.0 (2019); 7.3 (2020); 7.2 (2021); 6.7 (2022); 6.7 (2023); 6.3 (2024); 6.1 (2025); 5.9 (2026); 5.8 (2027) (Table 1 and Table 2 memorandum).

### Fiscal developments and pressures
- Fiscal performance worsened in 2020 due to COVID-19: tax revenues declined (moratorium on tax payments and weaker growth) while current expenditures increased partly due to higher COVID-19 related expenditures on goods and services (Figure 3 caption).
- Revenue (percent of GDP): 28.2 (2018); 29.4 (2019); 29.2 (2020); 25.8 (2021); 29.2 (2022); 29.7 (2023); 30.9 (2024); 30.8 (2025); 31.0 (2026); 31.1 (2027); 31.4 (2028) (Table 3b).
- Expenditure (percent of GDP): 30.9 (2018); 31.2 (2019); 38.8 (2020); 34.7 (2021); 35.8 (2022); 37.6 (2023); 34.6 (2024); 32.5 (2025); 31.7 (2026); 31.4 (2027); 31.3 (2028) (Table 3b).
- Overall balance (incl. grants, percent of GDP): -2.7 (2018); -1.8 (2019); -9.7 (2020); -8.9 (2021); -6.6 (2022); -7.9 (2023); -3.6 (2024); -1.7 (2025); -0.7 (2026); -0.3 (2027); 0.1 (2028) (Table 3b).
- Primary balance (percent of GDP): -0.1 (2018); 0.7 (2019); -7.0 (2020); -6.0 (2021); -3.8 (2022); -5.2 (2023); -0.7 (2024); 1.0 (2025); 1.9 (2026); 2.2 (2027); 2.4 (2028) (Table 3b).
- Total nominal government debt (percent of GDP): 124.7 (2018); 125.0 (2019); 137.5 (2020); 140.9 (2021); 134.8 (2022); 138.7 (2023); 132.0 (2024); 124.2 (2025); 115.8 (2026); 107.4 (2027); 98.9 (2028) (Table 1).

### Central government operations and financing
- Central government revenue (millions of CVE): 51,857 (2018); 57,389 (2019); 53,677 (2020); 43,751 (2021 prel.); 56,785 (2021 CR 20/297); projected revenue path: 53,896 (2022), 60,251 (2023), 64,489 (2024), 70,060 (2025), 76,031 (2026), 82,943 (2027) (Table 3a).
- Grants (millions CVE): 2,575 (2018); 6,238 (2019); 8,566 (2020); 5,224 (2021 prel.); grants projected 7,041 (2022), 4,050 (2023), 4,110 (2024), 2,488 (2025), 2,683 (2026), 2,901 (2027), 3,140 (2028) (Table 3a).
- Expenditure (millions CVE): 56,726 (2018); 60,974 (2019); 71,444 (2020); 58,776 (2021 prel.); projected 69,661 (2022), 68,229 (2023), 67,280 (2024), 68,118 (2025), 71,622 (2026), 76,741 (2027), 82,744 (2028) (Table 3a).
- Financing needs (millions CVE): 6,772 (2018); 9,978 (2019); 22,336 (2020); 16,857 (2021 prel.); projected 12,501 (2022), 13,799 (2023), 7,436 (2024), 4,127 (2025), 1,961 (2026), 1,297 (2027), 436 (2028) (Table 3a).

### Monetary sector and banking soundness
- Broad money (M2) change (percent): 1.4 (2018); 8.4 (2019); -5.2 (2020); 3.1 (2021); 4.5 (2022); 5.6 (2023); 4.5 (2024); 6.9 (2025); 6.5 (2026); 5.8 (2027); 5.9 (2028) (Table 4).
- Net foreign assets (change in percent of broad money): -2.1 (2018); 7.8 (2019); -5.7 (2020); -5.1 (2021); -1.5 (2022); -0.6 (2023); -0.6 (2024); 0.5 (2025); 1.5 (2026); 1.5 (2027); 1.6 (2028) (Table 4).
- Credit to the economy (percent change, year over year): 1.9 (2018); 2.3 (2019); 0.9 (2020); 2.1 (2021); 3.7 (2022); 4.0 (2023); 3.9 (2024); 4.1 (2025); 4.2 (2026); 4.1 (2027); 4.1 (2028) (Table 4).
- At end November 2020 broad money increased; credit to the economy increased reflecting the impact of COVID-19 relief measures (Figure 4 captions).
- Nonperforming loans have remained elevated (Figure 4 caption). NPLs to total loans: 10.4 (2018); 10.1 (2019); 11.0 (2020); 11.0 (2020Q1); 11.0 (2020Q2); 10.5 (2020Q3) — series from Table 5 and Figure 4.
- Bank regulatory capital to risk-weighted assets: 12.8 (2010), 15.2 (2011), 14.2 (2012), 15.1 (2013), 15.6 (2014), 16.2 (2015), 17.1 (2016), 17.3 (2017), 16.2 (2018), 17.7 (2019), 18.1 (2020), 18.3 (2020Q1), 18.6 (2020Q3) (Table 5).
- The central bank lowered the policy rate in response to the COVID-19 pandemic (Figure 4 caption).

### Risk Assessment — key risks and policy responses
- External: Unexpected shifts in the Covid-19 pandemic — relative likelihood Medium; impact if realized High. Policy response: Build resilience to shocks and accelerate growth-enhancing reforms (Table 6).
- 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: Cyber attacks — relative likelihood Medium; impact Medium. Policy response: Strengthen information security in government sector; improve financial regulation and supervision.
- External: Higher frequency/severity of natural disasters related to climate change — relative likelihood Medium/Low; impact Medium/High. Policy response: Build resilience to weather-related shocks and accelerate growth-enhancing reforms.
- Domestic: Faltering fiscal consolidation efforts — relative likelihood Medium/High; impact High. Policy response: Ensure COVID-19 relief measures are temporary; advance revenue-enhancing reforms, improve capital expenditure management, reduce fiscal risks (notably SOEs), and contain non-priority spending.
- Domestic: Delays in implementing productivity-enhancing and SOE restructuring measures — relative likelihood Medium; impact Medium. Policy response: Accelerate structural reforms after the epidemic subsides to improve business environment and enhance growth potential.

### Indicators of capacity to repay the Fund
- Outstanding Fund credit (millions of SDRs): 23.7 (2020); 23.7 (2021); 23.7 (2022); 23.7 (2023); 23.7 (2024); 21.3 (2025); 16.6 (2026); 11.9 (2027); 7.1 (2028); 2.4 (2029); 0.0 thereafter (Table 7).
- Total obligations based on existing and prospective credit (millions of U.S. dollars): 0.0 (2020); 0.0 (2021); 0.0 (2022); 0.0 (2023); 0.0 (2024); 3.5 (2025); 7.0 (2026); 7.0 (2027); 7.0 (2028); 7.0 (2029); 3.5 (2030); 0.0 thereafter (Table 7).
- Outstanding Fund credit as percent of quota: 100.0 (2020); 100.0 (2021); 100.0 (2022); 100.0 (2023); 100.0 (2024); 90.0 (2025); 70.0 (2026); 50.0 (2027); 30.0 (2028); 10.0 (2029); 0.0 thereafter (Table 7).
- Memorandum exports of goods and services (millions of U.S. dollars): 522.2 (2020); 733.1 (2021); 885.0 (2022); 987.4 (2023); 1,107.1 (2024); 1,234.8 (2025); 1,346.4 (2026); 1,498.3 (2027); 1,645.4 (2028); 1,798.5 (2029); 1,966.0 (2030); 2,132.1 (2031); 2,333.1 (2032); 2,545.4 (2033); 2,792.2 (2034) (Table 7 memoranda).

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

### Annex I. Adverse Scenario

### Annex I. Adverse Scenario

### Scenario description
- Presents the macroeconomic impact of a more severe COVID-19 shock in 2021 than assumed under the baseline scenario (Text Table 1).
- Assumes a more gradual global economic recovery and intensification of the domestic spread of the disease that would prolong the pandemic and trigger new containment measures.
- Under such circumstances, domestic demand would be weaker; tourism flows, transport services, and FDI would continue to be severely impacted, weakening the recovery.
- Real GDP growth would be much lower than under the baseline before accelerating to an average of 6 percent in the medium term.

### Macroeconomic impacts — growth and reserves
- Real GDP growth:
  - Baseline (selected years from Text Table 1): 2020 -14.0, 2021 5.8, 2022 6.0, 2023 6.1, 2024 6.1, 2025 6.2, 2026 6.2 (percent).
  - Adverse scenario (selected years from Text Table 1): 2020 -14.0, 2021 3.0, 2022 4.9, 2023 5.9, 2024 6.3, 2025 6.7, 2026 6.0 (percent).
- Gross international reserves (millions of euros):
  - Baseline: 2020 583.9, 2021 586.6, 2022 587.1, 2023 598.1, 2024 631.6, 2025 667.4, 2026 706.8.
  - Adverse scenario: 2020 583.9, 2021 526.7, 2022 424.8, 2023 404.1, 2024 450.7, 2025 471.7, 2026 500.7.
- Gross reserves (months of prospective imports of goods and services):
  - Baseline: 2020 7.2, 2021 6.7, 2022 6.3, 2023 6.1, 2024 5.9, 2025 5.8, 2026 5.8.
  - Adverse scenario: 2020 7.2, 2021 6.2, 2022 4.9, 2023 4.3, 2024 4.3, 2025 4.2, 2026 4.2.

### Fiscal and external outcomes (adverse scenario)
- Fiscal outcomes:
  - Tax revenues recover more slowly due to sluggish activity and lower tourism flows.
  - Additional spending on health and social protection is necessitated by deterioration of domestic health conditions.
  - Fiscal deficit would increase to 10.4 percent of GDP in the absence of additional fiscal consolidation measures.
  - Financing needs would increase to 10 percent of GDP.
  - Public debt would rise to 143.6 percent of GDP at end-2021 before declining to 107.8 percent of GDP at end-2026, some 9 percentage points higher than under the baseline scenario.
- Current account and capital flows:
  - Current account deficit would remain elevated at 13.3 percent of GDP in 2021, compared with a narrowing to 10.6 percent of GDP under baseline projections.
  - Financial account would come under pressure from lower FDI and portfolio inflows.
  - Gross international reserves decline to €526.7 million in 2021, equivalent to 6.2 months of prospective imports of goods and services, and remain low over the medium term, stabilizing around 4 months of prospective imports of goods and services.

### Policy implications and recommendations
- Emphasize contingency planning, credible fiscal consolidation, increased external financing, and continued structural reforms to anticipate and mitigate downside risks.
- Fiscal policy priorities:
  - Reduce non-priority spending.
  - Reduce domestically-financed investment other than counterpart funds for priority externally-financed investments.
  - Aim to contain the fiscal deficit at about 8 percent of GDP to help improve the external position and support medium-term debt sustainability.
- Financing recommendations:
  - Source additional concessional financing from development partners, including the AfDB, the EU, and the World Bank.
  - A Fund financing arrangement could help provide resources while playing a catalytic role.
- Structural reform priorities:
  - Accelerate structural reforms to support economic recovery and progress towards the pre-pandemic medium-term trajectory for growth, fiscal deficit, and public debt.

### Key statistics (adverse scenario vs baseline, selected indicators from Text Table 1)
- Primary balance (percent of GDP):
  - Baseline: 2020 -6.0, 2021 -5.2, 2022 -0.7, 2023 1.0, 2024 1.9, 2025 2.2, 2026 2.4.
  - Adverse scenario: 2020 -6.0, 2021 -7.3, 2022 -2.3, 2023 0.1, 2024 1.4, 2025 1.8, 2026 1.9.
- Fiscal balance (percent of GDP):
  - Baseline: 2020 -8.9, 2021 -7.9, 2022 -3.6, 2023 -1.7, 2024 -0.7, 2025 -0.3, 2026 0.1.
  - Adverse scenario: 2020 -8.9, 2021 -10.4, 2022 -5.5, 2023 -3.0, 2024 -1.7, 2025 -1.1, 2026 -0.8.
- Total financing needs (percent of GDP):
  - Baseline: 2020 10.0, 2021 7.6, 2022 3.8, 2023 2.0, 2024 0.9, 2025 0.5, 2026 0.2.
  - Adverse scenario: 2020 10.0, 2021 10.1, 2022 5.7, 2023 3.3, 2024 1.8, 2025 1.3, 2026 1.0.
- Current account balance (percent of GDP):
  - Baseline: 2020 -13.8, 2021 -10.6, 2022 -6.4, 2023 -4.7, 2024 -3.3, 2025 -2.8, 2026 -2.6.
  - Adverse scenario: 2020 -13.8, 2021 -13.3, 2022 -11.6, 2023 -7.3, 2024 -5.2, 2025 -4.3, 2026 -4.3.
- Public debt (percent of GDP):
  - Baseline: 2020 140.9, 2021 138.7, 2022 132.0, 2023 124.2, 2024 115.8, 2025 107.4, 2026 98.9.
  - Adverse scenario: 2020 140.9, 2021 143.6, 2022 140.0, 2023 133.0, 2024 124.8, 2025 115.8, 2026 107.8.
- Nominal GDP (billions of Cabo Verde escudos):
  - Baseline: 2020 169.3, 2021 181.3, 2022 194.7, 2023 209.5, 2024 225.9, 2025 244.2, 2026 264.3.
  - Adverse scenario: 2020 169.3, 2021 176.5, 2022 187.6, 2023 201.6, 2024 217.7, 2025 236.7, 2026 255.6.

*Source: IMF staff estimates and projections as presented in Annex I. Adverse Scenario.*

### 1.      The Executive Board of the International Monetary Fund (IMF) approved on July 15,

### 1cpvea2021002 - 1.      The Executive Board of the International Monetary Fund (IMF) approved on July 15,

### Program approval and objective
- The Executive Board of the IMF approved on July 15, 2019, an arrangement under the Policy Coordination Instrument (PCI) in support of Cabo Verde’s reform program.
- Overall objective: lay the foundations for stronger, more inclusive growth and support the Government’s reform agenda underpinned by the Strategic Plan for Sustainable Development (PEDS).
- Under the PCI, measures and reforms were implemented to: strengthen the fiscal and external positions; reduce fiscal risks; strengthen the monetary policy transmission mechanism; improve access to finance; and enhance medium-term growth prospects.

### Purpose of the Program Statement
- This Program Statement updates the one presented for the second review of the PCI completed on October 21, 2020.
- It describes recent economic and financial developments; outlines the Government’s economic program for 2021 and the medium term; discusses the economic outlook, risks, and mitigating measures; and describes performance under the third and final review of the program.

### Recent macroeconomic performance (pre-pandemic)
- Economic growth averaged 5 percent during 2016–19, reaching 5.7 percent in 2019.
- Tourist arrivals increased from 644,429 in 2016 to 819,308 in 2019.
- Overall fiscal deficit declined from 3 percent of GDP in 2016 to 1.8 percent of GDP in 2019.
- Public debt-to-GDP ratio fell from 127.8 percent in 2016 to 125 percent in 2019.
- Current account deficit moved from 5.1 percent of GDP in 2016 to 0.4 percent of GDP in 2019.
- International reserves increased from €541 million in 2016 to €663.4 million in 2019.

### COVID-19 shock and macroeconomic impact
- Tourism halted, leading to sharp GDP contractions in 2020:
  - Cumulative contraction of 14.8 percent, year-on-year (y/y), at end-September 2020.
  - Real GDP contraction for 2020 estimated at 14 percent.
- Unemployment rate estimated at 19 percent in 2020, up from 11.3 percent in 2019.
- Inflation: peak of 1.9 percent y/y in February 2020; declined to -0.9 percent (y/y) in December 2020.
- Current account for end-September 2020: deficit of CVE 18.6 billion, equivalent to 15.2 percent of GDP.
- Financial account deficit of CVE 16.7 billion for the first nine months of 2020; FDI fell by about 13 percent.
- Gross international reserves at end-December 2020: €584 million, enough to cover 7.2 months of prospective imports of goods and services.

### Government fiscal and social response to COVID-19
- Total expenditures related to COVID-19 amounted to CVE 2.8 billion.
- Support to businesses and workers:
  - Unemployment allowance covered 1,947 people at a cost of CVE 109.5 million.
  - Suspension of labor contracts costing CVE 1.4 billion, covering about 31,987 workers.
  - Four credit lines and one line of guarantees amounting to approximately CVE 2.5 billion were approved.
  - Over 575 loan applications approved totaling approximately CVE 3.9 billion:
    - Large corporations: CVE 1.8 billion.
    - Tourism, transport, and related activities: CVE 922 million.
    - Small and medium-sized companies: CVE 1.1 billion.
    - Microenterprises: CVE 157 million.
  - Support measures to businesses helped save over 12,300 jobs.
  - Suspension and installment payments of taxes and duties: about 747 applications considered, amounting to CVE 9.4 million.
  - Accelerated settlement of invoices and VAT refunds; tax payments moratorium.
- Social protection measures:
  - Solidarity income (RSO): monthly benefit of CVE 10,000; covered some 24,406 beneficiaries for a total of CVE 244 million.
  - Emergency Social Inclusion Income (RSI/E): CVE 5,500 per month intended for extremely vulnerable families; provision for some 11,622 families for CVE 211.9 million.
  - RSI/E extended for a further 6 months and recipients increased to over 18,000 families.
  - Immediate food assistance measures totaling CVE 80 million.
  - State hired 92 care givers to secure social protection for 712 seniors attending Day Centers at a cost of CVE 7.7 million.
  - Support for displaced students amounting to CVE 2 million.
- Eligibility for business relief measures required companies to demonstrate a quarterly decline in turnover of 30 percent or more.

### Central bank and financial sector policy measures
- Banco de Cabo Verde (BCV) measures:
  - Reduction in the policy rate by 125 basis points (bps) to 0.25 percent.
  - Reduction in minimum reserve requirements from 13 percent to 10 percent.
  - Reduction in the overnight deposit rate by 5 bps to 0.05 percent.
  - Reduction in the rate of permanent lending facilities by 250 bps to 0.5 percent.
  - Establishment of a long-term financing facility for banks.
  - Moratorium on loan repayments for borrowers meeting specified criteria.
  - Reduction of the capital adequacy ratio from 12 percent in 2019 to 11 percent for 2020 and 10 percent for 2021.
  - Recommendation that banks not distribute dividends on 2019 earnings.
- Financial sector outcomes (end-September/November 2020 data):
  - Regulatory capital-to-risk weighted assets: 18.6 percent (up from 15.6 percent in 2014); regulatory minimum is 12 percent.
  - Return-on-assets: 1 percent.
  - Return-on-equity: 12.7 percent.
  - Nonperforming loans (NPLs): 10.5 percent at end-September 2020 (down from 14.3 percent in 2014).
  - Credit to the economy grew by 4.4 percent y/y at end-November 2020.
  - Demand deposits grew by an estimated 4.4 percent y/y at end-November 2020.
  - At end-November 2020, suspension of loan payments measure had benefited 2,169 entities and 2,708 credit contracts and covered 19 percent of credit to the economy.
  - Long-term financing facility accessed by four smaller banks.

### Fiscal outturn and budget execution in 2020
- Tax revenues declined by 23.3 percent in 2020.
- Other revenues fell by 31.2 percent in 2020.
- Expenditures declined by 3.6 percent in 2020 despite additional spending on health, education, and social protection.
- Public investment program execution rate about 49 percent during 2020.
- Overall fiscal deficit estimated at CVE 15 billion (8.9 percent of GDP) in 2020, up from CVE 3.6 billion (1.8 percent of GDP) in 2019.
- Some high priority investment projects postponed to 2021.

### Transparency and accountability
- Government regularly published execution of COVID-19 related expenditures on the Ministry of Finance website.
- All pandemic-related expenditures to be audited by the tribunal of accounts as part of the 2020 budget audit.

### Performance under the Policy Coordination Instrument (PCI)
- Since program start in July 2019, Government met all quantitative targets except the floor on tax revenues (missed in first and second reviews).
- For the third and final review, all end-September 2020 quantitative targets were met.
  - Primary balance target met with a wide margin due primarily to lower execution of net acquisition of non-financial assets.
  - Floor on tax revenue was met.
  - Execution of net other liabilities was below target due to larger than projected repayments and slower execution of capitalization operations.
  - No accumulation of domestic or external payment arrears.
  - Nominal level of new concessional external debt of the central government was well-below the targeted ceiling.
  - Zero limit on new nonconcessional external debt of the central government was observed.
  - Net international reserves target met with a wide margin: reserves at €631 million at end-September compared with a target of €600 million.
- All non-quantitative continuous targets were met throughout the program:
  - No imposition or intensification of restrictions on payments and transfers for current international transactions, no multiple currency practices, no bilateral payment agreements inconsistent with Article VIII, and no imposition or intensification of import restrictions for balance of payments purposes.

### Structural reform progress under the PCI and PEDS (highlights)
- Fiscal and budgetary reforms:
  - Completion of a review report on exemptions identifying potential impact and streamlining actions (December 2019).
  - Streamlining of exemptions for import duties (June 2020).
  - Creation of a Sovereign Private Investment Guarantee Fund (SPIGF); law approved in June 2019; Board structure specified.
  - Preparation of a Strategy Note on the assets and liabilities and management of the SPIGF (April 2020).
  - Roll out of the tax arbitration center (February 2020).
  - Introduction of the electronic invoicing system (January 2021).
  - Introduction of the SAF-T (Standard Audit File for Tax Purposes) (December 2020).
  - Completion of second phase of VAT Monitoring Strategy (April 2019).
  - Introduction of second phase of taxpayers’ registration (March 2019).
  - Submission of fiscal policy reform agenda and action plan to combat tax avoidance and evasion (December 2019).
  - Approval of principles governing the new customs tariff by the Government (December 2020).
  - Adoption of the plan for public acquisitions, E-procurement, and public purchasing (December 2019).
  - Adoption of an integrated debt management system (December 2020).
  - Introduction and launch of the PAYLOG System (December 2019).
  - Approval of the law on budget principles (July 2019).
  - Creation of the National Council of Public Finances (September 2019).
- Digital governance and regulatory capacity:
  - Adoption of an action plan for digital governance (December 2019).
  - Adoption of a plan to strengthen regulatory capacity (continuous since July 2019).
- SOE reforms:
  - Privatization of the airline company (61 percent privatization by November 2019).
  - Public operation to sell 2.1 percent of the authorized capital that the State holds in ENACOL through the Cabo Verde Stock Exchange.
  - Design and implementation of a platform for monitoring the public enterprise sector (December 2020).
  - Implementation of quarterly monitoring of six key SOEs against approved budgets (continuous since July 2019).
  - Compilation of financial information on cashflow performance of the six largest SOEs for FY2019 and FY2020 (continuous).
  - Restructuring of the housing program managed by the housing company (IFH).
  - Granting of concession for inter-island maritime transportation (February 2019).
  - Publication of Decree-Laws 28/2020 and 29/2020 of March 3, establishing PARPÚBLICA, SGPS and IMOPÚBLICA, S.A.
- Monetary and foreign exchange reforms:
  - Promotion of effective regulation and supervision of financial transactions with the rest of the world.
  - Release of minutes of the Monetary Policy Committee meetings at least one month after each meeting starting end-July 2019.
  - Reduction of the overnight interest rate corridor to a maximum of 150-200 basis points (June 2019).
- Financial sector reforms and AML/CFT:
  - Approval and publication of the BCV Organic Law (Lei nº 84/IX/2020).
  - Revamping of the public credit registry information system (December 2020).
  - Creation of the National Commission on AML/CFT in January 2020.
  - Joining the Global Forum on Transparency and Exchange of Information for Tax Purposes.
  - Establishment of a network of agreements covering all EU member states, amendment of harmful tax regimes, and implementation of the OECD/G20 Inclusive Framework on BEPS minimum standard.
  - EU removed the country from its gray list.
- Business climate and diversification:
  - Approval of agenda for promoting MSMEs and diversifying the economy (December 2019).
  - Publication of the agenda for improving the business climate (continuous).
  - Signing and ratification of the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (November 2019).

*Italic: Source — Program Statement and related sections from the IMF publication (1cpvea2021002).*

### 16.      The Government’s policy and reform agenda will be driven by priorities under the

### 16.      The Government’s policy and reform agenda will be driven by priorities under the

### Policy priorities and near- to medium-term agenda
- Near term: minimize impacts of the pandemic, protect employment and vulnerable groups, support economic recovery; continue careful monitoring of COVID-19 relief measures.
- Medium term: PEDS II (2022-26), to be prepared in 2021 based on Cabo Verde Ambition 2030, will guide policies and reforms, with priority areas:
  - (i) enhancing domestic revenue mobilization to rebuild the revenue base eroded by the global pandemic and improve performance;
  - (ii) strengthening expenditure management and improving the execution of public investment projects;
  - (iii) advancing SOEs reforms to reduce fiscal risks and support medium-term fiscal and debt sustainability;
  - (iv) improving the monetary policy transmission mechanism;
  - (v) strengthening the financial system;
  - (vi) increasing access to finance and improving the business environment to support private sector development and boost inclusive growth.
- PEDS II additional focal areas: development of human capital; diversification of the tourism sector and improvement of its linkages with non-tourism sectors (particularly agriculture and fishery); development of the blue and digital economy; enhanced productivity in the agriculture sector.

### Economic outlook and projections
- 2021 rebound: real GDP projected to expand by 5.8 percent, based on gradual resumption of activity in tourism and transport sectors and recovery in other sectors.
- Medium-term growth: real GDP growth expected to average about 6 percent during 2022-26, conditional on pandemic abatement, reform implementation, and execution of planned large infrastructure projects.
- Current account: projected to narrow to 10.6 percent of GDP in 2021 and decline to 2.6 percent of GDP by 2026.
- Reserves: maintain gross international reserves around 6 months of prospective imports of goods and services over the medium term.
- Inflation: expected to remain low, and below 2 percent, consistent with euro area projections.
- Risks: high and mostly on the downside; main risks include the COVID-19 pandemic (prolonged pandemic would depress tourism, transport, and services), climate change, and less decisive fiscal consolidation and structural reform efforts post-pandemic.

### 2021 budget — objectives and high-level figures
- Budget aim: continue combating COVID-19 crisis and lay foundations for stronger growth and improved living standards.
- Budgeted revenues: CVE 58 billion (35 percent increase compared with 2020).
- Budgeted expenditures: CVE 76.1 billion (30 percent increase compared with 2020).
- Overall budget deficit (budgeted): CVE 18 billion.
- Net other liabilities budgeted: CVE 1.1 billion.
- Total financing needs (budgeted): CVE 16.9 billion.
- Execution stance: prudent execution with contamination of contingency measures to avoid domestic payment arrears; capital expenditures prioritized on key externally financed projects.

### 2021 fiscal framework (projected execution)
- Total revenues projected: CVE 53.9 billion (29.7 percent of GDP).
- Total expenditures projected: CVE 68.2 billion (37.6 percent of GDP).
- Primary deficit: projected reduction from 6 percent of GDP in 2020 to 5.2 percent of GDP in 2021.
- Public debt: estimated 140.9 percent of GDP in 2020, projected to reduce to 138.7 percent of GDP in 2021.
- Key budget components:
  - Tax revenues projected: CVE 37.6 billion (improvement from CVE 32.2 billion in 2020), supported by tax administration reforms (enhanced inspections, audits, post-customs clearance controls, intensified use of IT systems to improve monitoring of VAT payments, introduction of electronic invoicing, implementation of the 5 percent customs duties rate on previously exempted imports).
  - Other revenues projected: CVE 12.3 billion (increase from a very low base in 2020), assuming resumption of Government sales of goods and services, resumption of international flights, higher collection on fees from medical and passport services.
  - Grants projected: CVE 4 billion (decline from CVE 5.2 billion in 2020 reflecting phasing out of COVID-19 budget aid).
  - Expenditures projected: CVE 68.2 billion, with current expenditures at CVE 58.5 billion and capital expenditures at CVE 9.7 billion (priority externally financed projects delayed from 2020, notably three major projects in transportation (World Bank financed), water and sanitation for the island of Santiago (JICA), and information technology (African Development Bank)). Capital outlays scaled down from the 2021 budget figure of CVE 15 billion.
  - Total financing needs projected: CVE 13.8 billion, to be covered through domestic and external sources and DSSI extension. Financing composition projection:
    - Domestic financing from government securities market: CVE 2.8 billion (1.5 percent of GDP).
    - External financing from development partners: CVE 11 billion (6.1 percent of GDP).
    - DSSI projected: CVE 2.3 billion.

### Budgetary risk management and contingency
- Contingent expenditures identified: CVE 2.1 billion, to be executed only if certain revenue categories are collected.
- Monthly monitoring of budget execution and Treasury cashflow management to adjust expenditure commitments to financing capacity.

### Medium-term fiscal framework and targets (2021–2026)
- Focus: support development goals while preserving macroeconomic stability and debt sustainability via enhanced revenue mobilization and strengthened expenditure and Treasury cash flow management.
- Domestic revenues projection: increase from 27.5 percent of GDP in 2021 to 30.2 percent of GDP in 2026.
- Expenditures projection: decline from 37.6 percent of GDP in 2021 to 31.3 percent of GDP in 2026 (reflecting elimination of COVID-19 related expenses and containment of non-priority expenditures).
- Primary balance: projected to reach a surplus of 2.4 percent of GDP by 2026.
- Public debt: projected reduction to 99 percent of GDP by 2026.
- Revenue-enhancing and administration measures:
  - Broaden tax base, combat tax evasion, enhance efficiency via digitalization.
  - Completion by end-2021 of reforms initiated in 2020 to rationalize exemptions for VAT and excises.
  - Implementation of ECOWAS Common External Tariff (CET) in 2022 (originally planned for 2021); current estimates show a positive impact on revenues due to relatively higher CET rates.
  - Full implementation of electronic invoicing to include all enterprises; effective functioning of the Standard Audit File for tax purposes (SAF-T) system.

### Expenditure management and public investment
- Continue containing non-priority spending while balancing public investment scale-up and debt sustainability.
- Strengthen expenditure management, quality of budget preparation and execution, and monitoring/mitigation of fiscal risks.
- Capital expenditure measures: prioritization, increased execution capacity, based on projects portfolio review expected to be completed in 2021; initiate improved monitoring of project execution in 2021.

### Debt policy and debt management
- Prudent borrowing policies with reliance on concessional financing.
- Objective: gradually reduce public debt-to-GDP ratio to below 100 percent over the medium term; under current projections, this objective can be achieved in 2026, supported by:
  - return to pre-pandemic output level in 2023;
  - enhanced fiscal consolidation efforts;
  - expected acceleration in privatization and restructuring of SOEs;
  - continued reliance on concessional financing.
- Debt management strengthening:
  - Build on integrated debt database introduced in November 2019 covering domestic and external obligations.
  - Database expected to enhance recording and validation of debt data, facilitate payment of debt service obligations, support debt monitoring and reporting, and facilitate review of the Medium-Term Debt Strategy for 2021-2025.
  - Next phase: installation of modules to support production of medium-term debt management strategies and monitoring of contingent liabilities.

### Monetary policy
- BCV stance: maintained accommodative monetary policy to cushion pandemic impact, implemented measures to strengthen confidence and support liquidity; measures resulted in decline of lending rates and supported domestic credit growth.
- Liquidity facility: long-term facility introduced in April 2020; banks’ use has been marginal; facility extended through 2021 and list of eligible assets expanded to include credit guarantees by the government.
- BCV readiness: continue monitoring COVID-19 relief measures and economic/financial developments; stands ready to tighten monetary policy if needed to protect the peg; will resume reserve accumulation when conditions permit and maintain gross international reserves equivalent to at least 5 months of prospective imports of goods and services over the medium term.
- Transmission mechanism progress:
  - Narrowed overnight interest rate corridor; minutes of the Monetary Policy Committee’s meetings released.
  - Since July 2019 and throughout the pandemic, interest rate corridor kept at a maximum of 150-200 bps; minutes released after each meeting.
  - Next reform phase: strengthen monetary policy analysis by enhancing analytical and near-term forecasting tools, complete composite index of economic activity initiated last year, and begin work on a general equilibrium framework.
- BCV recapitalization: planned for 2019-21 with CVE 2.1 billion to be disbursed over three years; first tranche of CVE 700 million released at end-2019; additional allocations on hold until the end of the health crisis.

### Financial sector oversight and reforms
- BCV monitoring: closely monitor credit, liquidity, and operational risks; identify early warning signs and initiate prompt corrective actions; strengthen banks’ lending standards and risk management via enhanced supervision; improve instruments and tools for monitoring credit risk (off-site and on-site inspections).
- Macroprudential measures: introduced in response to the pandemic and extended to end-September 2021. As of end-November 2020:
  - Moratorium on loan repayments covered 19 percent of credit to the economy.
  - Tourism and transport sectors accounted for roughly 51 percent of moratorium coverage.
- BCV actions: enhanced monitoring of banking system regarding COVID-19 relief measures; discuss with banks a common framework for loan resolution given potential NPL increase post-moratorium; carry out comprehensive study of loan losses and provisions as conditions permit.
- AML/CFT strengthening: actions to align framework with FATF compliance requirements; strengthen domestic risk management capacity and regulatory environment; plans advanced to operationalize National Commission on AML/CFT and implement GLACY+ recommendations on combating cybercrimes.
- Financial sector reform priorities in 2021 (delayed from 2020):
  - Continued implementation of recommendations from the 2013 and 2015 asset quality review (follow-up on main debtors’ exposure, monitor assets received in kind, reinforce NPLs and provisions where identified).
  - Revamping public credit registry and information system: procurement and software development completed at end-2020; banks started reporting; microfinance institutions to start reporting in April; online dissemination of reports to consumers expected to begin in June.
  - Development of centralized official balance sheets database for the corporate sector to support risk-based supervision; accelerate process in 2021 to make up for pandemic delays.
  - Ensure Financial Stability Committee (created in 2011) becomes operational via operating regulations and quarterly meetings.
  - Operationalize National Commission for the Development of the Financial System: hold periodic meetings, define operating regulations, prepare action plan for financial system development to be adopted by the Council of Ministers.
  - Continue implementation of main recommendations of the report on access to finance for SMEs: with law on public credit registry passed on July 7, 2020, priority actions include adoption of regulations for the new law and provision of quality information to banks to better assess SME creditworthiness.

### Structural reforms and SOE agenda
- Reinvigorate SOE reforms halted by the health crisis; commitment to restructuring public enterprises to support growth prospects, mitigate fiscal risks, and support debt sustainability.
- Privatization agenda reprogrammed with objective of completing most operations as conditions permit; Government to complete a report on liabilities of privatized SOEs and implications for the government budget.
- Planned privatizations / transactions listed:
  - Privatization of CV Handling.
  - Granting of a concession for airports management.
  - Completion of the privatization of ELECTRA.
  - Sale of the remaining State’s shares (39 percent) in the airline company (CVA), strategy focused on sale on the stock exchange.
  - Completion of the sale of State’s shares in Caixa Económica.
  - Privatization and sale of shares in two companies in the pharmaceutical sector: INPHARMA and EMPROFAC (SOE).
  - Licensing of port services (ENAPOR) through a concession.

*Source: IMF country report text.*

### 35.      The Government  will accelerate other growth-enhancing structural reforms to support

### 35.      The Government  will accelerate other growth-enhancing structural reforms to support

### Reform agenda and priorities
- Focus: improving the business environment and facilitating access to finance to support private sector development.
- Near-term priority: implementation of macroeconomic and financial policy measures to provide tax relief and guarantee programs to alleviate financing constraints faced by the corporate sector resulting from the economic impact of COVID-19.
- Medium-term focus as the pandemic recedes:
  - Support economic recovery and enhance medium-term growth potential.
  - Promote access to finance for small and medium-sized enterprises through the efficient functioning of the financial ecosystem introduced in 2019 to facilitate guarantees, venture capital, and capacity development.
  - Operationalization of the Sovereign Private Investment Guarantee Fund (SPIGF) to be completed this year to support access to financing for large capital-intensive projects.
    - The SPIGF’s Board of Directors has been appointed.
    - Capitalization, using funds from the Trust Fund at the Bank of Portugal, will be completed by end-March as required by parliament.

### Program monitoring framework
- Progress under the Policy Coordination Instrument (PCI) is monitored through:
  - Quantitative targets and standard non-quantitative continuous targets presented in Table 1.
  - Reform targets presented in Table 2.
  - Quantitative targets are defined in the attached Technical Memorandum of Understanding (TMU).

### Key reform targets and implementation status (high level)
- Reform targets cover fiscal reforms, SOE reforms, monetary reforms, and financial sector reforms for 2019–21.
- Selected actions and statuses:
  - Complete a review report on exemptions (End-December 2019): Met.
  - Streamline exemptions for Import duties, VAT, and excises (End-June 2020; December 2020): Not met (substantial progress made).
  - Submit to Parliament the budget for 2020 in line with PCI commitments (End-October 2019): Met.
  - Prepare a Strategy Note on SPIGF assets and liabilities (End-April 2020): Met.
  - Implement quarterly monitoring of actual performance of 6 key SOEs against approved budgets starting end-December 2019: Met.
  - Release minutes of Monetary Policy Committee meetings at least one month after each meeting starting end-July 2019: Met.
  - Reduce the overnight interest rate corridor to a maximum of 150-200 basis points (End-December 2019; implemented in June 2019): Met.
  - Create a functional central registry of mobile collateral (Mid-January 2021): Not met.
  - Revamp the public credit registry information system by completing procurement of relevant software (End-December 2020): Met.

### Technical Memorandum of Understanding — selected quantitative and reporting rules
- Coverage and measurement conventions:
  - Central government excludes local government, extra-budgetary units, social security funds and public corporations.
  - Primary balance: total tax and non-tax revenues and grants minus primary expenditure; measured as cumulative flow over the calendar year; revenues recorded when funds are transferred to a government revenue account; tax revenues net of refunds; primary expenditure recorded on a cash basis.
  - Tax revenue floor: cumulative flow from the beginning of the calendar year; excludes asset sales, grants, and non-tax revenues.
  - Net Other Liabilities: sum of central government deposits, onlending, capitalization, and other assets; measured cumulatively over the calendar year.
  - Non-accumulation of domestic payments arrears: domestic payment obligation deemed in arrears if not paid within the normal grace period of 60 days (30 days for government salaries and debt service) unless otherwise specified.
- Concessionality and debt definitions:
  - A debt is concessional if it includes a grant element of at least 35 percent.
  - Present value calculations use the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).
  - Debt definitions follow Point 8(a) of the Guidelines on Public Debt Conditionality (Executive Board Decision No. 15688-(14/107), adopted December 5, 2014).
  - Debt rescheduling and debt reorganization are excluded from concessional and non-concessional debt limits.
  - 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.
- Net international reserves (NIR) of the Central Bank (BCV):
  - NIR defined as gross international reserves net of short-term external reserve liabilities, calculated at current exchange rates.
  - Gross reserves include gold, SDRs, reserve position at the IMF, holdings of foreign exchange, demand and short-term deposits abroad, fixed-term deposits that can be liquidated without penalty, and investment-grade securities.
  - Short-term external liabilities include liabilities with original maturity less than one year, net off-balance-sheet positions, arrears, and purchases from the IMF.
  - Program NIR floors will be adjusted downward by:
    - Cumulative upward deviations in external debt service relative to program assumptions.
    - Cumulative downward deviations in external financial assistance, and project and budget loans relative to program assumptions.
- Continuous targets and non-accumulation of external arrears:
  - Government will not accumulate new external payments arrears; external arrears defined as debt-service due and not paid within the contractually agreed period subject to applicable grace periods.
  - Arrears excluded when a clearance framework or rescheduling is sought.
- Reporting requirements and timetables (selected):
  - DNP of Ministry of Finance to provide monthly data for central government primary balance, tax revenues, and net other liabilities with a lag of no more than six weeks from end-of-period.
  - DNP to submit quarterly detailed table of stock of domestic payments arrears within six weeks after quarter end.
  - Details of all new external debt (including government guarantees) to be provided quarterly within six weeks of quarter end; government to consult Fund staff before assuming uncertain liabilities.
  - BCV to transmit NIR table monthly with a maximum delay of four weeks.
  - Data on exports and imports compiled by Director of Customs and BCV transmitted quarterly within five weeks after quarter end; preliminary quarterly balance of payments forwarded within six weeks after quarter end.
  - Statement of Other Economic Flows and consolidated balance sheet of specified SOEs transmitted annually within three months after the end of the following year (15 months after closing date).
- Memorandum item:
  - Indicative floor on central government social spending applies to expenditures on plans and programs with positive impact on education, health, and social protection, excluding wages and salaries; measured cumulatively over the fiscal year and reported quarterly with a lag of no more than six weeks.

*Source: 1cpvea2021002 - 35.      The Government  will accelerate other growth-enhancing structural reforms to support*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1cpvea2021002.pdf_