## 1cpvea2022001

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### EXECUTIVE SUMMARY — Context and Program Overview
- Cabo Verde faces economic challenges from COVID-19, rising food and fuel prices triggered by the war in Ukraine, and climate change after a fourth consecutive drought year.
- 2021 rebound: Real GDP growth reached 7 percent in 2021; private sector credit growth: 5.8 percent y/y.
- Authorities requested a 36-month Extended Credit Facility (ECF) with access at 190 percent of quota (SDR45.03 million, about US$63.37 million) to bolster reserves and support reforms.
- ECF anchors four pillars:
  1. Fiscal consolidation to place public debt on a decisive downward path and preserve debt sustainability;
  2. Public finance management (PFM) reforms to improve spending efficiency and reduce SOE fiscal risks;
  3. Modernize the monetary policy framework and strengthen the financial system;
  4. Structural reforms to raise potential growth and increase resilience to external shocks.
- Assessment: overall public debt at high risk of distress but “there is adequate capacity to repay the Fund.”

### Recent Economic Developments — Key Statistics
- Growth and inflation:
  - Real GDP growth: contracted 14.8 percent in 2020; rebounded 7 percent in 2021.
  - Inflation picked up to 7.6 percent in March 2022; inflation accelerated to 5.4 percent (y/y) in December 2021; projected to increase to 6.5 percent in 2022 and decline to 2 percent by 2024.
- External accounts and reserves:
  - Current account: 15 percent of GDP in 2020; narrowed to 11.3 percent in 2021.
  - Imports of goods and services increased by 10 percent in 2021.
  - Gross international reserves: €582.4 million in 2020; €591.3 million in 2021 (about 6.3 months of prospective imports).
  - Staff recommends reserves in the range of 5 to 5½ months of imports (LIC/MIC framework suggests about 3.7 months).
- Fiscal and public debt:
  - Overall deficit declined to 7.3 percent of GDP in 2021.
  - Public debt at end-2021: 143 percent of GDP.
  - Primary balance in 2021: deficit of 5.1 percent of GDP.
- Financial sector (end-2021):
  - Regulatory capital to risk weighted assets (CAR): 21.1 percent (regulatory minimum: 12 percent).
  - Return on assets: 1.5 percent.
  - Non-performing loans (NPLs): 9.5 percent at end-2020 to 7.2 percent at end-2021.
  - Moratorium on loan repayments expected to expire end-June 2022.

### Macroeconomic Outlook (Baseline and Medium Term)
- Near term:
  - 2022 real GDP growth revised down from 6 percent to 4 percent.
  - Current account projected to widen to about 14.1 percent of GDP in 2022.
  - Near-term inflation likely to remain elevated due to international oil and food price developments.
- Medium term (conditional on reforms):
  - Real GDP growth anticipated to remain robust at about 5½ percent (reflecting tourism recovery and PEDS reforms).
  - Current account deficit projected to narrow to about 4.2 percent of GDP by 2027.
  - International reserves expected to recover and stabilize at slightly above 5 months of prospective imports.
  - Primary fiscal balance projected to improve by about 1 percentage point of GDP per year over the medium term.
  - Public debt projected to decline from 143 percent of GDP in 2021 to about 110 percent of GDP by 2027.
  - Long-term GDP growth projected at about 4½ percent.

### Risks and Scenarios
- Main downside risks:
  - Evolution of the pandemic and impact on tourism.
  - Significant increases in fuel and food prices and tighter financial conditions owing to the Ukraine war.
  - De-anchoring of inflation expectations in advanced economies; vulnerability to natural disasters and climate change.
  - Domestic risks: insufficient fiscal consolidation and delays in SOE and structural reforms.
- Upside scenario: faster global containment of the pandemic could accelerate tourism recovery.
- Risk matrix highlights (selected items with relative likelihood and impact):
  - Geopolitical tensions, war in Ukraine (High/High) — responses include spending reviews, targeting the vulnerable, diversification, grants/concessional loans.
  - Rising food and energy prices (High/High) — responses include building buffers and renewable energy transition.
  - Outbreaks of lethal COVID-19 variants (Medium/High) — responses include vaccination rollout and prioritizing health spending.
  - Faltering fiscal consolidation and delayed SOE reforms (Medium/High) — responses include revenue-enhancing reforms and containing non-priority spending.
  - Climate-related disasters (Medium/Medium-High) — responses include building resilience and accelerating reforms.

### Fiscal Policy, Revenue Measures, and Consolidation Path
- Fiscal anchor: reduce debt-to-GDP from 143 percent to below 110 percent by 2027.
- Primary fiscal balance target: from deficit of 5.1 percent of GDP in 2021 to surplus of 1 percent of GDP by 2026 (or 2027 in different passages).
- 2022 adjustment:
  - Target: 1.5 percent of GDP improvement in the primary balance in 2022.
  - Projected primary deficit in 2022: decline to 3.6 percent of GDP.
  - Overall deficit: 7.3 percent of GDP in 2021 to 6.3 percent of GDP in 2022.
- 2022 revenue measures expected to yield about 1 percent of GDP, including:
  - Imposition of a 5 percent import duty on previously exempted imports.
  - Increase in excise tax on tobacco products (noted as 75 percent increase in another section).
  - Revenue administration reforms and VAT/personal/corporate arrears collection.
  - Completion of airport management concession expected to generate one-off revenues of about 1.8 percent of GDP; airport security tax expected to yield 0.3 percent of GDP.
- Medium-term revenue measures:
  - Electronic invoicing and tax administration reforms expected to yield an additional 2 percent of GDP over the medium term.
  - Implementation of the ECOWAS common external tariff projected to yield about 1 percent of GDP.
- Expenditure measures:
  - Streamline non-essential public investment projects.
  - Contain wage bill, transfers, and subsidies growth.
  - Protect social spending with an additional 0.3 percent of GDP allocated to targeted social safety nets (and in another passage 0.2 percent augment to reduce extreme poverty).

### Public Financial Management, SOEs, and Debt Management
- Fiscal structural benchmarks (selected):
  - Electronic invoicing for VAT covering at least 50 percent of taxpayers by end-2022.
  - Quarterly fiscal risk assessment reports; quarterly monitoring reports on SOEs’ budget execution.
  - Improve consolidated annual SOE reports; compile and publish historical series of general government financial statistics; publish annual budget execution reports for general government.
  - Finalize a business plan for Cabo Verde Airlines (CVA) and minimize losses ahead of re-privatization.
- SOE fiscal risks:
  - CVA preliminary estimate: will need about €30 million (1.7 percent of GDP) during 2022-23 pending re-privatization.
  - ELECTRA losses: CVE 1.5 billion (0.8 percent of GDP) in 2021; likely additional CVE 1 billion (about 0.5 percent of GDP) in 2022.
- Borrowing policy:
  - Prudent focus on concessional external borrowing; zero ceiling on non-concessional borrowing as a performance criterion.
- Debt developments and composition:
  - 41.6 percent of external debt; adding debt held by other multilaterals and collateralized debt brings the total to 54.2 percent.
  - Combined share projected to remain about 53 percent of external debt by 2025.
  - Total multilateral plus collateralized debt as a share of GDP projected to decline from 55 to 44.9 percent under the program.
  - Public external debt average interest rate below 1 percent; average maturity about 30 years.
  - Domestic debt at end-2021: 29 percent of total public debt; Treasury bonds constitute 98 percent of domestic debt with average maturity about 7 years and average interest rate 4.5 percent.

### Monetary Policy, Reserves, and Financial Sector Policies
- Monetary policy priorities:
  - Safeguard the peg and strengthen policy framework; reserve target: 5–5½ months of imports.
  - Near-term stance: balance supporting recovery and protecting the peg; BCV to monitor reserves and inflation and adjust policy as needed.
- Reserve adequacy:
  - Gross international reserves: 6.3 months of imports in 2021; staff projects medium-term coverage about 5 to 5.2 months.
  - LIC/MIC framework optimal level about 3.7 months; staff recommends higher reserves given vulnerabilities.
- Banking sector measures:
  - Gradual unwinding of COVID-19 support as liquidity remains high; moratorium ends June 2022.
  - BCV agreed to a comprehensive study of loan losses and provisions at moratorium expiration (SB, 2nd review).
  - Develop common framework for resolution of crisis-related NPLs (SB, 2nd review) in collaboration with the World Bank.
  - Develop reporting templates for restructured and rescheduled loans; monitor impact on asset quality.
  - Revamp stress testing methodology to include detailed banking data and cyber security risk assessment.
- Safeguards and governance:
  - Updated safeguards assessment substantially complete; BCV to adopt International Financial Reporting Standards by FY 2023.
  - Draft amendments to the BCV Law to strengthen decision-making, autonomy, accountability and transparency (Structural Benchmark).

### Structural Reforms, Growth Strategy, and Social Protection
- Structural reform priorities under PEDS 2022-2026:
  - Complete SOE reforms including privatization (CVA privatization highlighted).
  - Facilitate access to finance for SMEs; improve business environment; reduce informality.
  - Climate action: achieve 30 percent renewable energy by 2026 and 50 percent by 2030.
  - Digitalization: technology parks, central bank digital currency exploration, fintech strategy.
  - Economic diversification: integrated resort projects, blue economy, digital economy, desalinated water for agriculture.
- Social protection:
  - Expand and protect social safety nets; additional resources allocated to mitigate higher prices.
  - Sign a pact for poverty reduction aiming to eliminate extreme poverty by 2026.
  - Reform national social security system; protect the social registry and RSI cash transfer program during the ECF.
  - Indicative target on social spending and monitoring of allocations.

### External Sector Assessment (Annex IV) — Key Findings
- Overall assessment: external position in 2021 assessed as substantially stronger than fundamentals and desirable policy settings would imply, pointing to an undervaluation of the exchange rate.
- Current account:
  - CA deficit: 0.4 percent of GDP in 2019 to 15.0 percent in 2020; narrowed to 11.3 percent in 2021.
  - EBA-lite cyclically adjusted CA balance estimated at -6.0 percent of GDP in 2021; multilaterally consistent norm -11.3 percent; implied current account gap 5.8 percent of GDP.
  - REER undervaluation estimates: about 16.3 percent (from CA elasticities) and about 7.3 percent (EBA-lite REER model).
- External balance sheet:
  - NIIP (excluding short-term migrants’ deposits) reached -201 percent of GDP in 2021.
  - Gross external assets: 90 percent of GDP; gross external liabilities: 291 percent of GDP.
- Policy recommendations:
  - Sustained medium-term fiscal consolidation to lower external liabilities.
  - Continued structural reforms to reduce transaction costs and boost private sector development.
  - Build strong external buffers and reduce indebtedness to lower external vulnerability.

### Debt Sustainability Analysis (DSA) — Findings and Risks
- Risk ratings:
  - Risk of external debt distress: Moderate.
  - Overall risk of debt distress: High.
  - DSA notes PV of PPG external debt-to-GDP breaches its threshold in 2022 under baseline and more protractedly under stress tests.
- Projections and stress tests:
  - PV of public and publicly guaranteed external debt-to-GDP ratio breaches its threshold only in 2022 under baseline.
  - PV of total public debt-to-GDP ratio projected to breach the 70 percent benchmark through 2028 under baseline.
  - Debt service ratios remain manageable under baseline due to high concessionality, but vulnerable under growth or contingent liability shocks.
- Debt service and coverage:
  - Public external debt service to exports: 18.6 percent in 2021.
  - Public external debt service to revenue: 16 percent in 2020 and 22 percent in 2021.
  - Total public debt service absorbed about 41 percent of revenue and grants in 2022; projected to climb to about 49 percent in 2024.
- Contingent liability adjustments:
  - Default shock for SOEs’ debt raised markedly to reflect vulnerabilities (components amounting to CVE 20.8 billion at end-2021, 10.4 percent of GDP, plus non-guaranteed domestic SOE debt CVE 34.3 billion about 16 percent of GDP).

### Capacity to Repay the Fund and Fund Exposure
- By 2025, Fund credit outstanding will be at 280 percent of quota.
- Credit outstanding during the program would peak at:
  - about 3.6 percent of GDP,
  - 10 percent of exports,
  - 13.8 percent of gross international reserves,
  - 14.5 percent of revenue (excluding grants).
- Annual repayments to the Fund would peak at:
  - 0.6 percent of exports,
  - 0.9 percent of reserves,
  - almost 6.1 percent of PPG external debt service.
- Staff assesses Cabo Verde’s capacity to repay the Fund as adequate; mitigating factors include track record of servicing Fund obligations, envisaged fiscal consolidation, and expected tourism return.

### Program Conditionality, Monitoring, and Financing
- Quantitative performance criteria (cumulative from beginning of year) include:
  - Floor on tax revenues; floor on primary balance; ceiling on net other liabilities; non-accumulation of domestic and external arrears (continuous); 3 percent of GDP annual ceiling on net domestic financing; ceiling on PV of new concessional public and publicly guaranteed external debt; zero ceiling on contracting or guaranteeing non-concessional external debt with maturity over one year (continuous); floor on gross international reserves; floor on social spending as indicative target.
- Structural benchmarks phased and coordinated with development partners (examples listed above).
- Reviews: semi-annual reviews with PCs for end-June and end-December; indicative targets for end-March and end-September.
- Financing assurances:
  - Program fully financed for first 12 months; good prospects for full financing thereafter.
  - First-year financing includes Fund support and budget support from World Bank and African Development Bank and other partners.
- TMU highlights:
  - Program exchange rate: CVE 98.8 per one USD.
  - Unified discount rate for PV calculations: 5 percent; six-month USD LIBOR reference rate fixed at 2.699 percent for program purposes.
  - Reporting timelines specified for fiscal and external data (monthly to quarterly with defined lags).

*Source: Executive Summary, Letter of Intent, MEFP, Annexes, and DSA excerpts — 1cpvea2022001 (IMF).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Cabo Verde faces significant economic challenges from the lingering effects of the COVID-19 pandemic, rising food and fuel prices triggered by the war in Ukraine, and climate change after a fourth consecutive drought year.
- The economy rebounded strongly in 2021 following the COVID-19 induced recession in 2020, helped by authorities’ policy response and “one of the most successful vaccination programs in sub-Saharan Africa.”
- Spillovers from the Ukraine war are likely to:
  - Weaken the economic recovery;
  - Worsen fiscal and external positions;
  - Lead to higher inflation;
  - Result in a substantial decline in international reserves.
- Policy priorities identified: shore up international reserves, preserve debt sustainability, increase resilience to shocks (including climate change adaptation and mitigation), and make growth more inclusive.

### Program Objectives and Modalities
- Authorities requested a new Extended Credit Facility (ECF) to bolster reserves and support their economic reform program, anchored on four pillars:
  1. Fiscal consolidation to place public debt on a decisive downward path and preserve debt sustainability;
  2. Public finance management (PFM) reforms to improve the efficiency of public spending and reduce fiscal risks from state-owned enterprises (SOEs);
  3. Improvements to modernize the monetary policy framework and strengthen the financial system;
  4. Structural reforms to raise potential growth and increase resilience to external shocks.
- Staff support a 36-month ECF arrangement with semi-annual reviews and access at 190 percent of quota (SDR45.03 million, about US$63.37 million).
- The ECF would be used to shore up reserves and for budget support.
- Assessment of repayment capacity: overall public debt remains at high risk of distress but “there is adequate capacity to repay the Fund.”

### Program Policies
- Strong fiscal adjustment is needed to:
  - Boost policy credibility;
  - Set public debt on a decisive downward path.
- Social spending protection is essential to mitigate impacts from the pandemic and the Ukraine war.
- Fiscal reform agenda emphasis:
  - Domestic revenue mobilization;
  - Improvements in public finance management;
  - Containment of fiscal risks from SOEs—especially Cabo Verde Airlines (CVA).
- Financial sector measures include steps to contain risks from non-performing loans (NPLs) and potential erosion in banks’ asset quality at the expiration of exceptional COVID-19 support measures.

### Staff Views and Program Risks
- The Letter of Intent and Memorandum of Economic and Financial Policies indicate strong program ownership.
- Main program risk: uncertainty regarding the duration and impact of the Ukraine war.
- Mitigating factors: strong commitment, track record of implementing reforms, program ownership, capacity development support, and continued engagement by development partners.

### Recent Economic Developments
- 2021 rebound:
  - Real GDP growth reached 7 percent in 2021.
  - Private sector credit growth: 5.8 percent y/y.
  - Inflation picked up to 7.6 percent in March 2022 due to higher food, clothing, and transportation costs reflecting the impact of the Ukraine war.
- National accounts rebased to 2015 from 2007: published data indicates rebased nominal GDP is about 10 percent higher than previous estimates.
- COVID-19 vaccination:
  - More than 90 percent of the adult population have received at least one vaccine dose; vaccination rates close to 100 percent in some tourism islands.
  - Average number of daily COVID-19 cases declined to single digits (from about 1,000 cases in December 2021); total infections stood at 55,886 at end-April 2022.
- External sector 2021:
  - Current account narrowed from 15 percent of GDP in 2020 to 11.3 percent in 2021.
  - Imports of goods and services increased by 10 percent in 2021.
  - Gross international reserves increased from €582.4 million in 2020 to €591.3 million in 2021 (about 6.3 months of prospective imports), supported by SDR allocation (SDR 22.72 million; about 1.5 percent of GDP) and external loan disbursements.
- Reserve adequacy:
  - IMF LIC/MIC framework suggests reserves of about 3.7 months of imports.
  - Staff recommends reserves in the range of 5 to 5½ months of imports given Cabo Verde’s small size, undiversified structure, and vulnerability to external shocks.
- Financial sector (end-2021):
  - Regulatory capital to risk weighted assets (CAR): 21.1 percent (regulatory minimum: 12 percent).
  - Return on assets: 1.5 percent.
  - Non-performing loans (NPLs): declined from 9.5 percent at end-2020 to 7.2 percent at end-December 2021, reflecting the moratorium on loan repayments and write-off of legacy loans.
  - The moratorium on loan repayment is expected to expire at the end of June 2022.
- Fiscal 2021:
  - Overall deficit declined to 7.3 percent of GDP.
  - Financing: about 70 percent external disbursements and about 30 percent domestic financing.
  - Public debt at end-2021: 143 percent of GDP.
- SOEs and fiscal risks:
  - Privatization program postponed to 2022 after renationalization of Cabo Verde Airlines (CVA).
  - Preliminary estimate: CVA will need about €30 million (1.7 percent of GDP) during 2022-23 pending re-privatization.
  - ELECTRA losses: CVE 1.5 billion (0.8 percent of GDP) in 2021; likely an additional CVE 1 billion (about 0.5 percent of GDP) of losses in 2022 due to limited tariff adjustments amid rising fuel prices.
- Governance and transparency:
  - Authorities implemented governance commitments on crisis-related spending under the RCF and developed a framework for the use of the SDR allocation.
  - Transfer of SDR resources from Banco de Cabo Verde to the government completed in 2021 and included in public debt.
  - A Memorandum of Understanding detailing the framework for SDR use was signed between the Ministry of Finance and BCV.

### Macroeconomic Outlook and Risks
- Near-term outlook deterioration due to the Ukraine war:
  - 2022 real GDP growth revised down from 6 percent to 4 percent.
  - Current account projected to widen to about 14.1 percent of GDP in 2022.
  - Near-term inflation likely to remain elevated reflecting international oil and food price developments.
- Medium-term prospects (conditional on implementation of reforms):
  - Real GDP growth anticipated to remain robust at about 5½ percent (reflecting recovery of tourism and PEDS reforms).
  - Current account deficit projected to narrow to about 4 percent of GDP in the medium term.
  - International reserves expected to recover and stabilize at slightly above 5 months of prospective imports.
  - Primary fiscal balance projected to improve by about 1 percentage point of GDP per year over the medium-term due to revenue mobilization and expenditure restraint.
  - Public debt projected to decline from 143 percent of GDP in 2021 to about 110 percent of GDP by 2027.
  - Long-term GDP growth projected at about 4½ percent, broadly in line with potential growth.

*Source: Executive Summary, 1cpvea2022001 - EXECUTIVE SUMMARY (IMF).*

### 16.      However, the medium-term outlook is also subject to substantial risks. The main

### 1cpvea2022001 - 16.      However, the medium-term outlook is also subject to substantial risks. The main

### Risks and Medium-term Outlook
- Main downside risk: evolution of the pandemic and its impact on the external sector through a possible decline in tourism (Annex III).
- Additional downside risks: significant increases in fuel and food prices and tighter financial conditions owing to the Ukraine war.
- Other external risks: de-anchoring of inflation expectations in advanced economies; vulnerability to natural disasters (including those associated from climate change).
- Domestic risks: insufficient progress in fiscal consolidation and SOE reforms; possible delays in implementing structural reforms to increase productivity and diversify the economy.
- Upside scenario: faster than expected global containment of the pandemic could support a faster recovery of tourism and strengthen the pace of the economic recovery.
- Authorities’ view: agree with staff’s assessment (MEFP, ¶12); highlight uncertainties regarding the impact and duration of the Ukraine war; view projected gross international reserves cover as an important buffer; emphasize high growth potential and idle resources as economy returns to pre-pandemic output; see significant upside risk to medium-term growth if targeted growth-enhancing structural reforms are implemented.

### Program Objectives and Policies (Extended Credit Facility)
- Program objectives aligned with government’s PEDS:
  - Strengthening public finances to preserve public debt sustainability and expand social safety nets.
  - Reduce fiscal risks from public enterprises and improving their financial management and transparency.
  - Modernizing the monetary policy framework and improving the resilience of the financial system.
  - Raising growth potential and building resilience to shocks through structural reforms and economic diversification.
- Implementation prerequisites: strong ownership, continued support from development partners, timely implementation of reforms; program supports three-year reform agenda with IMF technical assistance; Tables 9 and 10 provide conditionality overview.

### Strengthening Public Finances to Preserve Public Debt Sustainability
- Fiscal consolidation anchor: reduce debt-to-GDP ratio from the current 143 percent to below 110 percent by 2027 (MEFP, ¶14).
- Primary fiscal balance target: improve from a deficit of 5.1 percent of GDP in 2021 to a surplus of 1 percent of GDP by 2026 (MEFP, ¶14).
- Associated external debt PV reduction: from 60.3 percent in 2021 to 45.9 percent in 2027.
- 2022 adjustment target: 1.5 percent of GDP improvement in the primary balance for 2022, mainly through higher revenues (Text Table 3; Table 3a and 3b).
- 2022 projected primary deficit: decline to 3.6 percent of GDP—about 0.4 percent of GDP lower than in the authorities’ original budget (MEFP¶15).
- Revenue mobilization measures (Text table 3; MEFP ¶17):
  - Imposition of a 5 percent import duty on previously exempted imports (including business furniture and other equipment).
  - Increase in the excise tax on tobacco products.
  - Efforts to reduce tax arrears on VAT, personal, and corporate income taxes.
  - Completion of the concession for airport management expected to generate one off revenues of about 1.8 percent of GDP.
  - Airport security tax expected to yield 0.3 percent of GDP.
  - Revenue mobilization measures expected to yield about 1 percent of GDP (Text table 3).
- Expenditure restraint measures:
  - Streamlining of non-essential public investment projects.
  - Prudent policies to contain growth of the wage bill, transfers, and subsidies (MEFP, ¶19).
  - Protection of social spending with an additional 0.3 percent of GDP allocated to targeted social safety net programs (MEFP, ¶20).
- Fiscal impact projection for 2021–2022:
  - Overall deficit reduction from 7.3 percent of GDP in 2021 to 6.3 percent in 2022.
  - Primary balance improvement from 5.1 percent to 3.6 percent.
- Risk mitigation note: war in Ukraine could negatively affect fiscal position via lower growth, weaker revenue collections, higher fuel prices impacting Cabo Verde Airlines; contingency involves further expenditure restraint (reducing non-priority public investment projects or slowing execution).
- Medium-term revenue measures:
  - Electronic invoicing and tax administration reforms expected to yield an additional 2 percent of GDP over the medium term (MEFP ¶18).
  - Implementation of ECOWAS common external tariff projected to yield about 1 percent of GDP over the medium term.
  - Government to submit 2023 budget aligned with program commitments (Structural Benchmark (SB), 2nd review).

### Fiscal Structural Reforms and SOE Risk Management
- Key fiscal structural measures (MEFP ¶22-26):
  - Electronic invoicing system for VAT covering at least 50 percent of taxpayers by end-2022 (SB, 2nd review).
  - Quarterly fiscal risk assessment reports (SB, 1st review).
  - Quarterly monitoring reports on SOEs’ budget execution (SB, 2nd review).
  - Improve consolidated annual SOEs reports (SB, 3rd review).
  - Compile and publish historical series of government financial statistics for general government (SB, 3rd review).
  - Publish annual budget execution reports for general government (SB, 3rd review).
  - Finalize a business plan for Cabo Verde Airlines to minimize losses and return to profitability ahead of re-privatization.
- Borrowing policy:
  - Prudent focus on moderate external borrowing on concessional terms and containment of domestic borrowing to prevent crowding out and preserve debt sustainability (Text table 4).
  - Program includes a zero ceiling on non-concessional borrowing as a performance criterion given high risk of overall debt distress.
- Debt sustainability context:
  - Debt service requirements remain manageable due to: (i) high degree of concessionality of external debt with an average interest rate below 1 percent; (ii) debt structure largely on fixed rates; (iii) fixed exchange rate and still adequate reserve levels.
  - Present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio breaches its threshold in 2022 under the baseline (shorter duration breach due to recent GDP rebasing) and more protractedly under stress test scenarios.
  - Preserving debt sustainability predicated on commitment to reforms agenda.

### Monetary Policy and Financial Stability
- Monetary policy priorities: safeguard the peg and strengthen the policy framework (MEFP ¶33).
- Reserve target: BCV should target reserves in the range of 5-5½ months of imports to support the peg.
- Near-term stance: appropriate balance between supporting recovery and protecting the peg.
- Unwinding COVID-19 support: BCV gradually unwinding accommodative monetary and financial measures as restrictions end and liquidity remains high (MEFP ¶10); BCV to monitor reserves and inflation and stand ready to adjust policy.
- Banking sector resilience: preliminary BCV assessment suggests banking sector is well placed to withstand projected increase in non-performing loans (MEFP ¶35).
  - BCV agreed to comprehensive study of loan losses and provisions at expiration of credit moratorium (end June 2022) (SB, 2nd review).
  - Encourage prudent restructuring of loans; provide guidance on prudential treatment of moratoria and NPL management strategies.
  - Develop a common framework for resolution of crisis-related NPLs (SB, 2nd review) (common framework developed jointly by BCV and the World Bank).
  - Develop detailed reporting templates for restructured and rescheduled loans and monitor impact of COVID measures on bank asset quality (MEFP ¶35).
- AML/CFT enhancements: implement GIABA 2019 Mutual Evaluation Report recommendations; build on 2020 national AML/CFT committee and strengthened risk-based supervision (MEFP ¶35).
- Corroborating factor: Cabo Verde’s exit from EU list of non-cooperative jurisdictions for tax purposes helped preserve correspondent banking relationships (CBR).
- Structural reforms to strengthen transmission and analytics (MEFP ¶34-38):
  - Preannounced schedule for TIM (Monetary Intervention Securities (MIS)) and TRM (Monetary Regularization Securities (MTS)) auctions to develop money market (SB, 1st review); schedule to be pre-announced on BCV website.
  - Strengthen payment systems.
  - Introduce composite indicators of economic activity (SB, 2nd review) and strengthen near-term forecasting.
  - Implement central bank digital currency.
  - Develop framework for emergency liquidity assistance provision.
- Safeguards assessment: updated safeguards assessment substantially complete; progress in external audit and financial reporting since 2008; legal amendments needed to strengthen BCV decision-making structure, autonomy, accountability and transparency (SB, 2nd review).
  - Lack of independent oversight body affected internal audit independence and effectiveness.
  - BCV will seek to adopt International Financial Reporting Standards by FY 2023 to enhance financial statement quality.

### Structural Reforms: Supporting Private Sector-Led Growth and Social Protection
- Structural reform priorities (MEFP ¶39-41):
  - Complete SOE reforms, including privatization and improving efficiency of public enterprises.
  - Facilitate access to finance, particularly for small and medium-sized enterprises.
  - Improve the business environment.
  - Climate change adaptation and mitigation measures; progress towards 50 percent renewable energy target by 2030.
  - Development of technology parks to enhance digitalization.
- Social safety nets:
  - Additional resources allocated to expand social safety net to mitigate impact of higher prices on the most vulnerable (MEFP ¶42-43).
  - Staff to coordinate with World Bank and AfDB on reforms to enhance social protection.

### Financing and Program Modalities (ECF)
- Purpose: ECF addresses protracted BOP needs from pandemic and Ukraine war; tourism expected to return to pre-pandemic level at end of medium term, generating persistent downward pressure on reserves.
- ECF roles: bolster reserves, close fiscal financing gap, support reforms under development strategy; reform implementation supported by IMF capacity development (Annex VI) and other donors.
- Financing mix aim: greater reliance on concessional external financing to avoid crowding out and preserve reserves (Text table 6).
- 2022 financing: remaining external financing gap to be filled mostly with concessional loans from multilateral institutions (World Bank, AfDB, bilateral partners) and drawdown of SDR allocation (about 1 percent of GDP) (MEFP¶8).
- IMF access: SDR 45.03 million (190 percent of quota; around USD 63.37 million) under 36-month ECF considered appropriate (Table 10).
  - Access frontloaded: some 95 percent of access in 2022, followed by equal purchases.
- Justification for 36 months: covers 2022 through 2025 given similar magnitude of fiscal and BOP shocks; period required to lower debt to more moderate levels and address significant scarring from pandemic and Ukraine war.
- Reserve objective: financing from the Fund will help keep reserves within targeted range of 5 to 5½ months of imports in 2022 and over medium term to support the peg and allow smoother fiscal adjustment.

### Program Conditionality, Monitoring, and Financing Assurances
- Performance criteria (PC) to monitor program (Table 8; PCs cumulative from beginning of year):
  - Floor on tax revenues.
  - Floor on primary balance.
  - Ceiling on net other liabilities (on lending and capitalization).
  - Non-accumulation of domestic and external arrears (continuous).
  - 3 percent of GDP annual ceiling on net domestic financing.
  - Ceiling on the PV of new concessional public and publicly guaranteed external debt.
  - Zero ceiling on contracting or guaranteeing non-concessional external debt with maturity of more than one year (continuous).
  - Floor on gross international reserves.
  - Floor on social spending as an indicative target.
  - Standard continuous targets included.
- Reviews: semi-annual reviews with PCs for end-June and end-December and indicative targets for end-March and end-September.
- Structural benchmarks: calibrated and phased in line with authorities’ plans and implementation capacity, coordinated with development partners.
- Financing assurances:
  - Program fully financed for first 12 months, with good prospects for full financing for remainder.
  - First-year financing includes Fund support and budget support from development partners and multilateral institutions including World Bank and African Development Bank.

*Source: Cabo Verde authorities and IMF staff projections (excerpt).*

### 38.      Cabo Verde’s capacity to repay the Fund is assessed as adequate and enhanced

### 38.      Cabo Verde’s capacity to repay the Fund is assessed as adequate and enhanced

### Capacity to repay and Fund exposure
- By 2025, Cabo Verde’s Fund credit outstanding will be at 280 percent of quota.
- Credit outstanding during the program would peak at:
  - about 3.6 percent of GDP,
  - 10 percent of exports,
  - 13.8 percent of gross international reserves,
  - 14.5 percent of revenue (excluding grants).
- Annual repayments to the Fund would peak at:
  - 0.6 percent of exports,
  - 0.9 percent of reserves,
  - almost 6.1 percent of PPG external debt service.
- Safeguard rules are applied given the proposed access levels (Table 6, Annex VII).
- Mitigating factors:
  - Authorities’ strong track record of servicing their debt obligations to the Fund.
  - Policy measures envisaged in the program, including fiscal consolidation.
  - Return of tourists expected to generate significant repayment capacity through increased export receipts.

### Program risks and monitoring
- Overall risk assessment: Risks to the program are assessed as moderate, conditional on:
  - successful implementation of the reform agenda,
  - a significant reduction of the debt stock going forward.
- Downside factors increasing risks:
  - worsened global outlook,
  - ongoing spillovers from the Ukraine war,
  - high risk of overall debt distress remains a concern.
- Mitigating factors noted by staff:
  - authorities’ strong track record under the recently completed PCI,
  - strong program ownership.
- Policy response: program reviews and continued dialogue with the authorities will help mitigate risks; medium-term risks will be closely monitored as they could impact program performance.

### Staff appraisal — macroeconomic outlook and needs
- Current challenges:
  - impacts of the pandemic,
  - spillover effects of the war in Ukraine,
  - climate change effects after a fourth consecutive drought year.
- Consequences: growth expected to weaken, inflation will rise substantially, and fiscal and external pressures will intensify.
- Program request and objectives:
  - Authorities request support under an Extended Credit Facility (ECF) to address the BOP gap and fiscal financing needs stemming from the pandemic and the war in Ukraine.
  - Program would anchor the authorities’ medium term economic strategy and support reforms to achieve sustained growth and poverty reduction.

### Fiscal policy and debt dynamics
- Fiscal consolidation is needed to contain debt vulnerabilities, but should be gradual to safeguard growth and protect vulnerable groups.
- Primary fiscal balance path: authorities plan to bring the primary balance deficit of 5.1 percent of GDP in 2021 to a surplus of about 1 percent of GDP over the medium term.
- Debt risk characterization:
  - External public debt: moderate rate of debt distress.
  - Overall public debt: high risk of distress due to high levels of domestic borrowing in recent years.
- Fiscal reform agenda supported by the program includes:
  - focus on domestic revenue mobilization,
  - efforts to advance SOE reforms to contain fiscal risks.

### Social protection and labor market
- Reinforcing the social safety net is essential to make growth more inclusive and equitable.
- Policy measures recommended:
  - higher allocation of resources for social spending to mitigate rising prices on the most vulnerable,
  - improvements in targeting and coverage of existing programs to increase efficiency of public spending and support eradication of extreme poverty,
  - vigorous implementation of the graduation strategy to enhance skills and labor market policies to generate jobs and reduce dependency on social support.

### Monetary policy and financial sector recommendations
- Monetary policy priorities:
  - continue to focus on safeguarding the peg and strengthening the monetary policy framework,
  - maintain reserves in the range of 5 to 5½ months of imports,
  - enhance analytical capacity of the central bank (BCV).
- Banking sector guidance:
  - BCV should continue gradual unwinding of the COVID-related moratorium and liquidity support measures given continued excess liquidity.
  - BCV should strengthen the AML/CFT component of its prudential supervision.
  - Monitor risks in the banking sector, since the end of the credit moratorium in June 2022 is likely to result in a spike in NPLs and an erosion in banks’ asset quality.
  - BCV intends to carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium, facilitate prudent restructuring of loans, and provide guidance on prudential treatment of moratoria and NPL management strategies.

### Structural reforms and growth potential
- Raising medium-term growth potential requires steadfast implementation of the authorities’ medium-term development plan.
- Key reform priorities:
  - completing SOE reforms, including through privatization and improving efficiency of public enterprises,
  - steps in climate change adaptation, including efforts to reach the goal of 50 percent renewable energy supply by 2030.

### Fund support recommendation
- Staff support for the authorities’ request:
  - a 36-month arrangement under the ECF with access equivalent to 190 percent of quota (SDR 45.03 million).
  - Support rationale: balance of payments and fiscal financing needs, positive track record of reform implementation, policy credibility, and home-grown ownership of the reform program.

### GDP rebasing (Annex II) — key results
- Rebasing changed the base year from 2007 to 2015; updated accounts published in March 2022.
- Benchmarking and rebasing led to an upward revision of GDP by 9.6 percent.
- GDP increased to 173,911 million Cape Verdean escudos (CVE) in 2015—an increase of 15,212 million CVE compared to the 2007 base.
- Sectoral changes (absolute and percent as reported):
  - Primary sector: shank by -2,721 million CVE (-19.6 percent).
  - Secondary sector: shank by -3,340 million CVE (-11.6 percent).
  - Tertiary sector: increased by 20,743 million CVE (21.6 percent).
- Sectoral weights after rebasing:
  - Tertiary sector now represents 67.2 percent of output.
  - Primary weight declined to 6.4 percent.
  - Secondary weight declined to 14.6 percent.
  - Taxes net of subsidies on products: 11.8 percent and contributed 0.3 percent in the rebased GDP.
- Expenditure and external balance:
  - Final consumer expenditure increased by 7.7 percent and contributed 6.5 percent to the rebased GDP; moved from CVE 133,410 million to CVE 143,704 million.
  - Gross fixed capital formation increased by 0.8 percent and contributed 0.2 percent to rebased GDP; investment rate declined from 30.2 percent to 29.1 percent.
  - Imports declined 2.1 percent and exports increased by 0.4 percent, resulting in an improved external balance contributing 1.4 percent to the increase in GDP.

### Risk Assessment Matrix — selected high-probability / high-impact risks and policy responses
- Geopolitical tensions, war in Ukraine (Relative likelihood: High; Impact: High)
  - Potential impacts: disruptions in supply chains, deteriorated tourism sector, balance of payments problems, higher inflation, food insecurity and poverty.
  - Policy responses:
    - Create fiscal space through spending review and tax mobilization.
    - Prioritize and target public spending towards the most vulnerable people.
    - Diversify the economy.
    - Allocate additional grants and concessional loans to cover external needs.
- Rising and volatile food and energy prices (Relative likelihood: High; Impact: High)
  - Potential impacts: worsened current account, balance of payments problems, higher inflation.
  - Policy responses:
    - Build external buffers and resilience to shocks.
    - Diversify energy usage (renewable energies transition) to mitigate oil price shocks.
- Outbreaks of lethal and highly contagious COVID-19 variants (Relative likelihood: Medium; Impact: High)
  - Potential impacts: disrupted tourism and economic activity, negative growth and external/fiscal positions.
  - Policy responses:
    - Enhance and optimize vaccination roll-out targeting high-risk populations and critical areas.
    - Prioritize spending towards the health sector.
    - Slow down planned unwinding of policy support while ensuring recovery is well entrenched.
- De-anchoring of inflation expectations in the U.S. (Relative likelihood: Medium; Impact: Medium)
  - Potential impacts: rising core yields and risk premia, higher cost of new debt, pressure on foreign reserves and the financial account, reduced flow of migrant deposits.
  - Policy responses:
    - Take concessional debt with Bilateral and/or Multilateral creditors during high yield periods.
    - Maintain a relatively large liquidity buffer and measures to keep domestic markets liquid.
    - Stand ready to tighten monetary policy.
- Faltering fiscal consolidation and delayed SOE reforms (Relative likelihood: Medium/High; Impact: High)
  - Potential impacts: undermine macroeconomic stability and delay return to pre-COVID fiscal and debt sustainability trajectory.
  - Policy responses:
    - Ensure relief measures are temporary; advance revenue-enhancing reforms, improve capital expenditure management, reduce fiscal risks linked to SOEs, and contain non-priority spending.
- Higher frequency and severity of climate-related natural disasters (Relative likelihood: Medium; Impact: Medium/High)
  - Potential impacts: undermine agricultural production, negative impact on GDP growth and inflation, accelerate emigration.
  - Policy responses:
    - Build resilience to weather-related shocks and accelerate growth-enhancing reforms.
- Cyber-attacks (Relative likelihood: Medium; Impact: Medium)
  - Potential impacts: weaker confidence, instability in the financial system, disruption of domestic activity.
  - Policy responses:
    - Strengthen information security particularly in the government sector.
    - Improve financial regulation and supervision to enhance the resilience of the financial system.
- Delays in implementing measures to increase productivity and restructure SOEs (Relative likelihood: Medium; Impact: Medium)
  - Policy responses:
    - Follow through with SOE reform plans and accelerate other structural reforms to improve the business environment, reduce the State’s role in productive activities and enhance growth potential.

*Source: Cabo Verde — INTERNATIONAL MONETARY FUND.*

### Annex IV. External Sector Assessment

### Annex IV. External Sector Assessment

### Overall assessment
- Cabo Verde’s external position in 2021 is assessed as substantially stronger than the level implied by fundamentals and desirable policy settings, which points to an undervaluation of the exchange rate.
- The high and negative net international investment position (NIIP) is a source of vulnerability, but risks are partly contained by the structure of external liabilities, largely composed of FDI and long-term debt.
- Reserve adequacy is assessed as satisfactory: actual reserve levels (6.3 months of imports) are comfortably above the IMF LIC/MIC framework optimal level (about 3.7 months).
- Cabo Verde’s business environment has improved in recent years, but continued structural reforms remain critical to enhance competitiveness.

### A. Current Account — background and findings
- COVID-19 effects:
  - Current account deficit widened from 0.4 percent in 2019 to 15.0 percent of GDP in 2020.
  - Exports of goods and services contracted sharply, driven by a 69.1 percent decline in tourism receipts.
  - Imports of goods and services fell by 23.2 percent.
  - Financial flows covered the largest share of the current account deficit in 2020.
- 2021–2027 path:
  - Current account deficit estimated to have narrowed to 11.3 percent of GDP in 2021 (as export growth, tourism and remittances recover).
  - Widened in 2022 as the war in Ukraine reverses earlier gains.
  - Projected to narrow and improve to 4.2 percent of GDP by 2027, supported by expansion of tourism and implementation of the fiscal consolidation program.
- EBA-lite CA model results:
  - Cyclically adjusted current account balance estimated at -6.0 percent of GDP in 2021.
  - Multilaterally consistent cyclically adjusted current account norm is -11.3 percent of GDP.
  - Implied current account gap: 5.8 percent of GDP.
  - Using estimated CA elasticities implies an undervaluation of the REER of about 16.3 percent.
  - Caveats: CA model does not fully capture Cabo Verde’s need to save externally for natural disaster risk and is not robust to shocks of the magnitude experienced during the COVID-19 pandemic.

### B. Real Effective Exchange Rate (REER)
- Background:
  - REER has been relatively stable over the past decade.
  - Depreciated by 1.2 percent in 2021 compared with an appreciation of 1.3 percent in 2020.
- EBA-lite REER model:
  - Suggests an undervaluation of the REER of about 7.3 percent.

### C. Capital and Financial Flows
- Background:
  - Private capital flows remained robust in 2021 at levels comparable to 2020; increase reflected higher other foreign investments.
  - Net financial account balance declined marginally from 15.3 percent of GDP in 2020 to 11.5 percent in 2021 due to a slight decrease in net official borrowing.
- Medium-term outlook:
  - Net capital and financial flows expected to slow down and stabilize around 3 percent of GDP.
  - Overall balance of payments projected to record surpluses starting in 2022 in line with projected improvement in the current account.

### D. Reserve Adequacy
- Background and levels:
  - Gross international reserves declined by €82.2 million to €582.4 million in 2020 as export receipts and private capital flows declined.
  - Gross international reserves recovered to €591.3 million in 2021.
  - Coverage of prospective imports of goods and services: 6.3 months in 2021.
  - Medium-term projection: coverage projected to remain stable between 5 and 5.2 months.
- Assessment:
  - LIC/MIC framework optimal level for Cabo Verde: about 3.7 months of prospective cover of imports.
  - Staff’s medium-term projections indicate a level of reserves of about 5 months of prospective cover of imports of goods and services.
  - Fragilities (small economy size, lack of export diversification, vulnerability to exogenous shocks) call for a higher level of reserves.

### E. External Balance Sheet
- Background:
  - NIIP (excluding short-term migrants’ deposits) increased in 2021 to reach -201 percent of GDP.
  - Gross external assets: 90 percent of GDP.
  - Gross external liabilities: 291 percent of GDP.
  - This persistently large negative external position is a significant source of external vulnerability.
- External sustainability approach (ES):
  - ES calculates REER adjustment required to satisfy the inter-temporal budget constraint.
  - ES approach suggests NIIP does not deteriorate in net present value terms, implying no change in the REER is needed under that narrow definition of sustainability.
  - Caveat: this definition of sustainability is narrow and does not account for all vulnerabilities associated with the NIIP level or composition.
  - Policy implication: measures to reduce indebtedness are important to reduce overall external vulnerability.

### F. Non-Price Competitiveness
- Background and indicators:
  - World Economic Forum index: Cabo Verde’s overall score for global competitiveness increased to 50.8 in 2019 due to gains in human capital (health), labor markets and innovation capability.
  - The country lost ground in ICT adaptation, product market and infrastructure.
- Assessment:
  - Decisive structural reforms are needed to improve the business environment and attract private investment.
  - Key areas for improvement: reliable power supply, access to finance, protecting minority investors, paying taxes, and trading across borders.

### G. Overall assessment and policy recommendations
- Valuation:
  - Staff’s assessment suggests the exchange rate might be slightly undervalued.
  - Three methodologies (external sustainability approach, EBA-lite current account model, and REER model) point to an undervaluation of the REER, though the degree of undervaluation is relatively modest.
  - Large external liabilities imply the external position remains highly vulnerable to shocks.
- Recommended policies:
  - Sustained medium-term fiscal consolidation to lower external liabilities and support medium-term external sustainability.
  - Continued implementation of structural reforms to reduce transaction costs, increase labor market flexibility, boost productivity, and support private sector development.
  - Build strong external buffers given vulnerabilities and the need to protect the peg.
  - Policies to reduce indebtedness to lower external vulnerability.

*Source: Annex IV. External Sector Assessment (Cabo Verde).*

### 41.6 percent of external debt; adding debt held by other multilaterals and collateralized debt brings

### 1cpvea2022001 - 41.6 percent of external debt; adding debt held by other multilaterals and collateralized debt brings

### Debt composition and projections
- 41.6 percent of external debt; adding debt held by other multilaterals and collateralized debt brings the total to 54.2 percent.
- The combined share of such debt is projected to remain at about 53 percent of external debt by 2025.
- Total multilateral plus collateralized debt as a share of GDP is projected to decline under the program, from 55 to 44.9 percent.

### Cabo Verde’s capacity to repay the Fund
- Cabo Verde’s capacity to repay the Fund is assessed to be adequate.
- By 2025, Cabo Verde’s Fund credit outstanding will be at 280 percent of quota (above the top quartile of past UCT-quality arrangements for LICs).
- Credit outstanding during the program would peak at about:
  - 3.6 percent of GDP,
  - 10 percent of exports,
  - 13.8 of gross international reserves,
  - 14.5 percent of revenue (excluding grants).
- Annual repayments to the Fund would peak at:
  - 0.6 percent of exports,
  - 0.9 percent of reserves,
  - almost 6.1 percent of PPG external debt service.
- Risk mitigants noted:
  - authorities’ strong track record of servicing Fund obligations,
  - policy measures envisaged in the program, including envisaged fiscal consolidation,
  - the return of tourists expected to generate significant repayment capacity through increased export receipts.

### Program request, objectives, and coverage
- Request: IMF support under an Extended Credit Facility (ECF) for June 2022–June 2025 in the amount of SDR 45.03 million (190 percent of quota).
- Program objectives include:
  - maintaining economic and financial stability,
  - reducing vulnerabilities to external shocks,
  - strengthening prospects for higher, sustainable, and inclusive growth.
- Main policy objectives:
  - strengthen public finances to increase fiscal space and reduce fiscal risks from public enterprises,
  - modernization of the monetary policy framework and strengthening the financial system,
  - raise growth potential and build resilience to shocks including climate-related events.
- Program monitoring: semi-annual IMF reviews; implementation monitored through performance criteria, indicative targets, and structural benchmarks as described in the MEFP and TMU.

### Background and recent economic developments (pre- and post-pandemic)
- Pre-pandemic performance:
  - annual average growth about 4.7 percent during 2016-2019 (led by tourism and PEDS implementation),
  - gross official reserves increased to 9.0 months of prospective imports cover by end 2019.
- Pandemic impact (2020):
  - output contracted by about 15 percent in 2020,
  - fiscal deficit widened from a surplus/deficit of 1.7 percent of GDP in 2019 to a deficit of 9.1 percent of GDP in 2020,
  - public debt rose to 142.6 percent of GDP in 2020 (an increase of over 20 percentage points),
  - external current account deficit widened to 15 percent of GDP in 2020.
- Recovery in 2021:
  - real GDP growth rebounded to 7 percent in 2021,
  - about 98 percent of the adult population received at least one vaccine dose; 84.5 percent fully vaccinated (in another passage vaccination cited as over 95 percent with about 85 percent fully vaccinated; both figures appear in the source),
  - inflation accelerated to 5.4 percent (y/y) in December 2021,
  - external current account deficit narrowed from 15 percent of GDP in 2020 to 11.3 percent of GDP in 2021,
  - gross international reserves increased from €582.4 million in 2020 to €591.3 million in 2021 (about 6.3 months of prospected imports),
  - public debt stock stood at 143 percent of GDP at end 2021.

### Fiscal policy response and transparency
- Fiscal measures in 2020 included:
  - loan guarantees amounting to CVE 4 billion,
  - moratorium on corporate income tax and the VAT,
  - temporary reduction in the VAT rate for the tourism sector to 10 percent,
  - cancellation of pension fund contributions.
- 2021 fiscal outcomes:
  - total revenues decreased by 0.2 percent,
  - capital expenditure about 2.6 percent of GDP (3.7 percent of GDP lower than budgeted),
  - overall fiscal deficit estimated at 7.3 percent of GDP in 2021 compared to 9.1 percent in 2020,
  - deficit financed through external disbursements (about 70 percent) and domestic financial system (about 30 percent).
- Transparency: COVID-19 related expenditures published daily on the Ministry of Finance website and audited by the Court of accounts; MoU signed between the Ministry of Finance and the Banco de Cabo Verde for SDR use.
- Planned SDR-financed projects total CVE 3 billion (about 1.7 percent of GDP) across health; agriculture and environment; education and culture; infrastructure, land use planning, and housing.

### Monetary and financial sector developments
- Monetary policy stance:
  - policy rate reduced in 2020 to 0.25 percent,
  - minimum reserve requirement reduced to 10 percent,
  - overnight deposit rate lowered to 0.05 percent,
  - permanent lending rate lowered to 0.05 percent,
  - these rates maintained through to June 2022.
- Interest rates and credit:
  - interest rates on deposits declined to 0.7 percent at end 2021 (1.9 percent at end 2020),
  - lending rates broadly stable at just under 9 percent,
  - credit to the economy grew by 5.8 percent in 2021,
  - migrant deposits rose in 2021 compared with 2020.
- Financial soundness indicators at end-December 2021:
  - regulatory capital to risk weighted assets (CAR) 21.1 percent (regulatory minimum 12 percent),
  - return on assets 1.5 percent,
  - non-performing loans (NPLs) declined to 7.2 percent of total loans (from 9.5 percent at end 2020).

### Macroeconomic outlook and risks
- Near-term growth revision:
  - Real GDP growth expected to be revised from 6 percent to 4 percent for 2022 due to the war in Ukraine, higher international energy and food prices, and weakened euro area growth prospects.
- Medium- to long-term prospects:
  - growth projected at about 4½ percent over the long term, broadly in line with potential growth potential,
  - annual inflation projected at about 2 percent, on average, after 2023, broadly in line with the euro area average.
- Key downside risks:
  - spillovers from the war in Ukraine (energy and food price shocks),
  - pressures on international reserves and the pegged exchange rate regime,
  - weaker tourism recovery than projected.

### Policy commitments and structural priorities
- Program will support Government’s Sustainable Development Strategy 2022-2026 (PEDS) priorities including:
  - inclusive tourism benefiting all islands,
  - transform Cabo Verde into an air transportation hub and international business center,
  - create an international finance platform and a digital platform for technological innovation,
  - create a special economic zone for the maritime economy (blue economy),
  - develop wave energy and desalination technologies,
  - support investment opportunities developed locally or by the diaspora.
- Other program commitments:
  - preserve public debt sustainability and strengthen public finances,
  - modernize and strengthen the monetary policy framework and maintain adequate international reserves,
  - enhance the resilience of the financial system,
  - accelerate state-owned enterprise reforms,
  - enhance mechanisms to protect the most vulnerable,
  - broaden foundations for resilience to climate change, natural disasters, and other exogenous shocks.

*Source: Cabo Verde Letter of Intent, Memorandum of Economic and Financial Policies, and supporting material as provided in the content unit.*

### 13.      The primary fiscal balance would improve by about 1 percent of GDP per year during

### 13.      The primary fiscal balance would improve by about 1 percent of GDP per year during

### Medium-term outlook and macroeconomic impact
- Primary fiscal balance projected to improve by about 1 percent of GDP per year during 2023-2026.
- Planned fiscal consolidation, successful restructuring of the major SOEs, and other structural reforms expected to:
  - lead to faster growth of credit to the private sector;
  - boost investor confidence;
  - accelerate medium-term growth;
  - place public debt on a sustained downward path.
- External current account deficit projected to narrow to about 4.2 percent of GDP in the medium-term, supported by fiscal consolidation, strong tourism performance, and higher remittances.
- International reserves, supported by Fund financing, improved tourism receipts and remittances, will remain at about 5 months of prospective imports.

### Strengthening public finances: objectives and fiscal targets
- Frontloaded adjustment in 2022 followed by gradual but sustained consolidation over the medium term to:
  - place public debt on a sustained downward path;
  - preserve debt sustainability;
  - reduce the risk of debt distress.
- Overall fiscal program results:
  - Primary fiscal balance improves from a deficit of 5.1 percent of GDP in 2021 to a surplus of about 1 percent of GDP in 2027.
  - Overall fiscal deficit declines from 7.3 percent of GDP in 2021 to about 1 percent of GDP by 2027.
  - Debt-to-GDP ratio declines from 143 percent in 2021 to 109.6 percent in 2027.
- Large component of the 2022 adjustment based on revenue measures.

### 2022 budget: revisions and fiscal outcomes
- Original 2022 design: reduce primary fiscal deficit from 5.1 percent of GDP in 2021 to 4 percent of GDP in 2022 through higher revenue and lower expenditures.
- Revised revenue projections:
  - Projected revenue intake revised to 25.4 percent of GDP (3 percent of GDP higher than in 2021 but 1.8 percent of GDP below the budgeted amount).
  - Strong gains expected on taxes on goods and services and on income and profits relative to 2021 outturn.
- Expenditure revisions:
  - Current expenditures now projected to increase by 0.7 percent of GDP (was budgeted to increase by about 1.3 percent of GDP).
  - Wages projected to decrease; spending on existing social programs augmented by 0.3 percent of GDP.
  - Capital expenditure now projected to increase to 3.7 percent of GDP (budgeted at 5 percent of GDP; about 2.4 percent of GDP above 2021 outcome).
- Result: primary fiscal deficit projected to improve to 3.6 percent of GDP in 2022.
- Budgeted financing needs:
  - Initially 2.3 percent of GDP higher than 2021 outturn; now projected to increase by about 1.7 percent of GDP.
  - Revised domestic financing above the 3 percent of GDP ceiling due to suspension of the fiscal rule in 2022 (escape clause).
  - External financing sources include: World Bank (1.3 percent of GDP), African Development Bank (1 percent of GDP), drawdown of recent SDR allocation (0.9 GDP), resources under the ECF program, and official creditors.

### Revenue measures (near-term and medium-term)
- 2022 revenue measures expected yield about 1 percent of GDP, including:
  - Introduction of electronic invoicing: 0.2 percent of GDP.
  - Imposition of a 5 percent import duty on previously exempted goods (business furniture and equipment): 0.2 percent of GDP.
  - Increase in the excise tax on tobacco by 75 percent: 0.2 percent of GDP.
  - Revenue administration improvements (tax arrears collection, heightened supervision): 0.4 percent of GDP.
- Further revenue administration reforms:
  - Focus on VAT and personal and corporate income tax arrears collection.
  - Complete digitalization of revenue administration and collection processes; electronic invoicing system due to be completed by end 2023.
  - By end 2022: electronic invoicing to cover at least 50 percent of taxpayers for VAT (Structural Benchmark).
  - Resumption and extension of the integrated safety system for non-compliance alerts.
  - Expected additional gains from improved compliance: 2 percent of GDP over the medium term.
  - Implementation of the ECOWAS common external tariff expected to yield about 1 percent of GDP.
  - Government to submit 2023 budget in line with program commitments (Structural Benchmark).

### Expenditure policies and social protection
- Near-term: current spending broadly stable; medium-term: efficiency gains sought with gradual decline in current expenditures as share of GDP.
- Objective to increase public investment program as share of GDP, with strict prioritization of capital expenditure.
- Social welfare:
  - Review and streamline social welfare programs to ensure adequate coverage amid rising prices.
  - Government will augment funding for social programs by 0.2 percent of GDP to decrease extreme poverty.
- Commitment to additional policy measures to improve revenue mobilization, public expenditure management, and continued SOE reforms to maintain medium-term debt sustainability.
- Aim to return to pre-pandemic levels of spending in the medium term without decline in service delivery through improved spending efficiency.

### Fiscal reforms and public investment management
- Public investment framework improvements following IMF TA recommendations to ensure better, feasible projects via four steps:
  - Redefine thresholds to reduce number of projects qualifying for detailed appraisal.
  - Develop and implement an enhanced pre-screening system (pre-screening+), a single-entry point for all project ideas.
  - Develop and implement multi-criteria analysis (MCA) techniques and matrices for prioritization and selection.
  - Develop and implement a pre-implementation checklist.

### Cash flow, fiscal coverage, and transparency
- Cash flow management improvements:
  - Continue bringing all central government accounts into the Treasury Single Account (TSA).
  - Institute a cash coordination committee to systematically review forecasts.
  - Build on SIGOF adoption and TSA development.
- Broaden fiscal coverage to prepare accounts at general government level:
  - Compile and publish historical series of government financial statistics for the general government (Structural Benchmark).
  - Publish annual budget execution reports for the general government (Structural Benchmark).
- SOE fiscal risk reduction:
  - Reinvigorate SOE reforms and improve monitoring framework for SOE financial performance.
  - Quarterly fiscal risk assessments using IMF SOE health check tool and quarterly monitoring report of SOEs’ budget execution (Structural Benchmark).
  - Publish quarterly consolidated transaction and financial flows between government and SOEs (individual and aggregate).
  - Improve annual SOEs’ report to include execution vs initial budget, performance vs medium-term plans, and data on government relations (Structural Benchmark).

### Cabo Verde Airlines (CVA)
- CVA reorganization and privatization:
  - Government intends to complete reorganization and resume privatization efforts.
  - Under new plan: CVA to start operations with two aircrafts in 2022, increasing to three in 2023.
  - Airline to fly to [four international cities]; projected to achieve breakeven by March 2023 based on projections.
  - Government to provide financing during reorganization: €30 million (about 1.7 percent of GDP).
  - Seek Cabinet approval of (i) the least cost structure for CVA; and (ii) the long-term strategy for CVA, in consultation with the World Bank.

### Public debt management and legal reforms
- Ongoing efforts to ease public debt burden:
  - Agreement with Portugal to continue receiving debt service relief in line with the DSSI treatment during 2022; continued conversations with other creditors.
- Debt law and guarantee framework updates:
  - Update debt legislation in line with 2018 review; identify required reports.
  - Implement internal debt sustainability analysis (DSA) requirement; first internal DSA to be conducted by January 2023 to inform 2023 budget.
  - Review guarantees law to establish a fund financed by beneficiaries of guarantees; activate fund in 2022 and establish operational regulations.

### Macroeconomic Stabilization Fund and climate vulnerability
- Establishment of a macroeconomic stabilization fund to build buffers against external shocks, including climate-related events.
- Rationale: small open economy susceptible to external shocks (drought since 2017, pandemic impacts, spillovers from Ukraine war).
- Natural disaster cost estimate:
  - Average economic damage from natural disasters, particularly floods, estimated at US $18 million (I percent of GDP) per year by the World Bank.

### National accounts rebasing
- National Statistics Institute (INE) rebased national accounts to 2015 (from 2007) with IMF TA.
- Published data indicate nominal GDP about 10 percent higher than previous estimates, reflecting more accurate measurement of services sector.

### Monetary policy, reserves, and financial stability
- Fixed peg exchange regime continues to anchor monetary policy.
- Monetary policy priorities:
  - Safeguard the peg and strengthen monetary policy framework.
  - Near-term: BCV will closely monitor euro area developments and stand ready to take corrective measures if reserve pressures become excessive.
  - Medium-term reserve target to support the peg: range of 5 to 5½ months of prospective imports.
- Unwinding COVID-19 monetary stimulus was in progress given excess liquidity; geopolitical shock warrants more cautious approach.
- Monetary policy transmission and analytical capacity enhancements (Structural Benchmarks):
  - Pre-announce schedule for auctions of Monetary Intervention Securities (TIMs) and Monetary Regularization Securities (TRMs).
  - Introduce composite indicators of economic activity and strengthen near-term forecasting.
  - Develop framework for emergency liquidity assistance.
  - Seek World Bank TA for digital economy assessment and national fintech strategy.
- Banking sector and NPLs:
  - Indicators suggest banking sector can withstand projected increase in NPLs after credit moratorium ends in June 2022.
  - BCV actions:
    - Comprehensive study of loan losses and provisions at moratorium expiration in June 2022 (Structural Benchmark).
    - Encourage and facilitate prudent loan restructuring and provide guidance on prudential treatment of moratoria and NPLs.
    - Develop common framework for bank resolution and a common framework for resolution of crisis-related NPLs (Structural Benchmark).
    - Develop detailed reporting templates for restructured and rescheduled loans and for monitoring COVID-19 related measures’ impact on asset quality.
  - Recent AML/CFT improvements, establishment of national AML/CFT committee, and exit from EU list of non-cooperative jurisdictions have helped preserve correspondent banking relationships.
- Financial sector development:
  - Modernization efforts to deepen financial sector, support inclusive and sustainable growth, and preserve financial stability.
  - Increase frequency of stress testing to at least two times a year.

*Source: 1cpvea2022001 - 13.      The primary fiscal balance would improve by about 1 percent of GDP per year during*

### 2023. In addition, the stress testing methodology will be revamped to include detailed banking data

### 1cpvea2022001 - 2023. In addition, the stress testing methodology will be revamped to include detailed banking data

### Banking sector governance, supervision, and statistics
- Stress testing methodology will be revamped to include detailed banking data and cyber security risk assessment.
- The recent IMF safeguards assessment mission recommended amending the BCV Law to strengthen the decision-making structure, autonomy, accountability and transparency of the central bank.
- Supported by technical assistance from the IMF, draft amendments to the BCV Law will be submitted to the Ministry of Finance to address the gaps identified (Structural Benchmark).
- Work will be accelerated towards the adaption of Basel II Pillar 1.
  - During the first half of 2023 an evaluation will be undertaken of the implementation of the Basel principles through the BCP Self-Assessment (more details to be provided by BCV).
- Improvements to monetary and financial sector statistics:
  - Discrepancies between the monetary and financial sector survey disseminated by the BCV in its publications and data sent to the IMF have been eliminated by adopting the IMF’s 2016 Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG) methodology.
  - The new compilation system allows for correcting discrepancies between the other deposit corporations (ODC) survey disseminated by the BCV and the data sent to the IMF.
  - Further improvements will continue with enhancement of data on credit by economic activity using INE’s economic activity classification.

### Structural reforms: supporting private sector-led growth
- The new five-year strategy (PEDS) is based on the long-term development plan (Cabo Verde Ambition 2030).
- Key priority areas:
  - Completing SOE reforms, including through privatization and improving the efficiency of SOEs.
  - Reducing informality.
  - Facilitating access to finance, particularly for small and medium-sized enterprises.
  - Improving the business environment.
- Labor market reforms:
  - The government will examine possible changes to the labor code with a view to increasing incentives to make the labor market more dynamic.
- Climate and digital priorities:
  - Achieve 30 percent renewable energy target by 2026 and 50 percent by 2030.
  - Digitalization, including the development of technology parks.
- Economic diversification:
  - Within tourism, move towards more integrated resort projects with top hotel brands.
  - Promote alternative sectors: blue economy, digital economy, industry integrated into regional and global value chains, and modernization of agriculture using desalinated water.
- Business environment reforms:
  - Legal procedures for businesses will be made easier by improving linkages between businesses and judicial processes.
  - Digitalize land titling information to reduce unclear ownership issues and delays in investment decisions.

### Social protection and inclusion
- The government will enhance support to vulnerable groups by strengthening social safety nets.
- Objectives and measures:
  - Sign a pact for poverty reduction with the goal of eliminating extreme poverty by 2026.
  - Reform the national social security system during the program period to align with best practices.
  - Protect investments in delivery systems for social protection, particularly the social registry and the [RSI] cash transfer program, during the IMF-supported ECF.
  - Monitor social spending partly through an indicative target on social spending.
  - Continue a program of productive inclusion guaranteeing empowerment and cash transfers to the most vulnerable families.

### Risks and contingencies
- Major external risks:
  - Uncertainty about the trajectory of the COVID-19 pandemic.
  - Evolution of the spillover impact of the Ukraine war.
- Policy stance in adverse scenarios:
  - If COVID-19 deteriorates or the Ukraine impact worsens relative to the baseline, economic outcomes would worsen.
  - Authorities commit to take additional measures in consultation with the IMF if the macroeconomic outlook deteriorates.
- Confidence factors:
  - Commitment to reforms under the Fund-supported ECF and continued support from development partners provide a strong platform to manage challenges.

### Financing and program monitoring
- Program monitoring framework:
  - Quantitative performance criteria, indicative targets, and structural benchmarks will be used.
  - The Technical Memorandum of Understanding (TMU) describes definitions and data provision requirements.
- Review schedule:
  - First and second program reviews are scheduled to be completed by November 2022 and May 2023 (based on end-June and end-December 2022 test dates, respectively).
  - Thereafter, monitoring will continue on a semi-annual basis by the IMF Executive Board.
- Data provision:
  - For several fiscal targets, data will be provided to the Fund by the Directorate National of Planning (DNP) of the Ministry of Finance monthly with a lag of no more than six weeks from the end of period.
  - Detailed tables on domestic payments arrears to be submitted quarterly within six weeks after quarter end.

### Key quantitative definitions, thresholds, and parameters (TMU highlights)
- Program exchange rate:
  - All assets and liabilities denominated in U.S. dollars (USD) will be converted into escudos at a program exchange rate of CVE 98.8 per one USD.
- Primary balance and revenue definitions:
  - Central government primary balance measured as cumulative flow over the calendar year; revenues recorded when funds are transferred to a government revenue account; central government primary expenditure recorded on a cash basis.
- Domestic payments arrears:
  - An obligation is in arrears if not paid within the normal grace period of 60 days (30 days for government salaries and debt service) unless otherwise specified or under good faith negotiations.
- Ceiling on the PV of new external concessional debt:
  - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies in case deviations are prompted by a change in financing terms.
  - For program purposes, debt is concessional if it includes a grant element of at least 35 percent.
  - The unified discount rate used for PV calculations is 5 percent.
- Variable-rate debt PV calculations:
  - Program reference rate for the six-month USD LIBOR is 2.699 percent and will remain fixed for the duration of the program.
  - Spread of six-month Euro LIBOR over six-month USD LIBOR is -168 basis points.
  - Spread of six-month GBP LIBOR over six-month USD LIBOR is -80 basis points.
  - For currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is 100 basis points.
  - Where variable rates are linked to other benchmarks, a spread reflecting the difference to six-month USD LIBOR (rounded to the nearest 50 bps) will be added.
  - TMU can be updated to reflect benchmark replacements (SOFR, SONIA, EURIBOR, TONAR) prior to complete LIBOR phase-out, once operationally feasible.
- Reporting requirements for new external debt:
  - Government to consult with Fund staff before assuming liabilities when uncertain whether an instrument falls under the quantitative target.
  - Details of all new external debt (including government guarantees), with terms and creditors, to be provided quarterly within six weeks of quarter end.

*Source: 1cpvea2022001 - 2023. In addition, the stress testing methodology will be revamped to include detailed banking data*

### 18.      Under the program, ceilings on medium- and long-term, as well as on short-term,

### Under the program, ceilings on medium- and long-term, as well as on short-term, non-concessional external debt constitute quantitative target.

### Non-concessional external debt quantitative target
- The zero ceiling on non-concessional external debt is on a continuous basis.
- For program purpose, a debt is non-concessional if it includes a grant element of less than 35 percent.
- The grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
- The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
- For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt.
- The discount rate used is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).
- Debt rescheduling and debt reorganization are excluded from the limits on non-concessional external debt.
- The quantitative target covers new non-concessional external debt contracted or guaranteed by the central government, excluding borrowing from the Fund.
- Non-concessional external debt excludes normal short-term (less than one year) import-related financing.
- The Portuguese government’s precautionary credit line (the “Portuguese credit line”) in support of the exchange rate peg is excluded from the definition of non-concessional external debt (continuous PC target).

### Reporting requirements for external debt
- The government of Cabo Verde will consult with Fund staff before assuming any liabilities where they are uncertain whether the instrument falls under the quantitative targets.
- Details of all new external debt (including government guarantees), indicating terms of debt and creditors, will be provided on a quarterly basis within six weeks of the end of each quarter.

### Gross International Reserves (GIR) of the Central Bank (BCV)
- The floor on the stock of GIR of the BCV constitutes a quantitative target under the program.
- GIR are defined as gross international reserves of the BCV including assets that are readily available (liquid and marketable and free of any pledges or encumbrances), controlled by the BCV and held for balance of payments needs and FX market intervention.
- Included in GIR: gold, holdings of SDRs, the 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.
- The program floors for GIR 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 purposes of calculating the adjusters, these flows will be valued at current exchange rates.
- Reporting requirements: A table on the GIR prepared by the BCV will be transmitted on a monthly basis, with a maximum delay of four weeks.

### Non-Accumulation of External Payments Arrears
- The government will not accumulate any new external payments arrears; this is a continuous target under the program.
- Monitoring: 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.
- Exclusion: Arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded.
- Reporting requirements: Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the DNP of the Ministry of Finance, within six weeks of the end of each quarter.
- The government will inform Fund staff immediately of any accumulation of external arrears.

### Floor on Central Government Social Spending
- The floor on social spending of the central government is an indicative target under the program.
- 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.
- Measurement and 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 and assessment of reform targets
- Exports and imports data (volume and prices) compiled by the Director of Customs and the BCV: transmitted quarterly within five weeks after the end of each quarter.
- A preliminary quarterly balance of payments, compiled by the BCV: 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: 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: transmitted annually within three months after the end of the following year (15 months after the closing date).
- Reform targets and assessment criteria:
  - Pre-announce a schedule for TIM and TRM auctions reform target — assessed as achieved when pre-announcements are posted on the central bank website.
  - Introduce a composite indicator of economic activity reform target — assessed as achieved when the central bank has released the composite indicator.
  - Carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium in June 2022 — assessed as achieved when the study is completed and released.
  - Develop a common framework for the resolution of the crisis related NPLs — assessed as achieved when the common framework is complete and released; the common framework is being developed jointly by the BCV and the World Bank.

### Debt Sustainability Analysis (Joint Bank-Fund) — key findings and risk ratings
- Risk of external debt distress: Moderate
- Overall risk of debt distress: High
- Granularity in the risk rating: Sustainable
- Application of judgement: No
- Summary assessment:
  - Overall risk of debt distress remains high, unchanged from the joint WB/IMF DSA of October 2020.
  - Risk of external debt distress is assessed at moderate, upgraded from the last DSA.
  - The PV of public and publicly guaranteed (PPG) external debt-to-GDP ratio breaches its threshold only in 2022 under the baseline, and protractedly under stress test scenarios.
  - Liquidity indicators (debt service to revenue and to export ratios) remain firmly below their respective thresholds under the baseline, reflecting the high concessional nature of Cabo Verde’s external debt.
  - The PV of total public debt-to-GDP ratio is projected to breach the threshold during 2022–28 under the baseline scenario and stress test.
  - The external and overall debt outlook is assessed to be sustainable conditional on assumptions including continued recovery of economic activity in 2022, a return to the pre-pandemic fiscal consolidation path, resumption of structural reforms (notably to restructure SOEs to reduce fiscal risks), prudent borrowing policies (sourcing mainly concessional external loans) and strengthened debt management, and measures to enhance the government securities market.
  - Continuous progress in export and output diversification is needed for long-term debt sustainability.

### Public debt coverage and data improvements
- Coverage aligned with previous DSA:
  - Social security funds and local governments excluded from the DSA.
  - Coverage of extra budgetary funds (EBFs) is focused on government support to SOEs through on-lending and capitalization.
  - Government guarantees to SOEs’ external borrowing are included in the baseline stock of debt; publicly guaranteed domestic debt and non-guaranteed debt by SOEs are not included.
- Efforts to broaden public sector debt coverage are ongoing, including a World Bank project focused on SOEs.
- Data quality improvements: a new system of recording and monitoring debt introduced under the Fund-supported program resulted in more accurate and timely dissemination of public debt information.
- Contingent liability tailored stress test adjustments:
  - Default shock for components of general government not captured in baseline stock raised from 0 percent of GDP to 0.2 percent of GDP to account for publicly guaranteed domestic debt of local governments.
  - Default shock for SOEs’ debt raised from 2 percent of GDP to 26.4 percent of GDP to reflect vulnerabilities associated with: (i) publicly guaranteed domestic borrowing by ELECTRA, TACV, IFH, ENAPOR, NEWCO, CERMI amounting to CVE 20.8 billion at end-2021 (10.4 percent of GDP); and (ii) non-guaranteed domestic debt of loss-making SOEs totaling CVE 34.3 billion (about 16 percent of GDP).
  - Default shock of 1.1 percent of GDP kept for PPPs.
  - Financial market shock minimum value of 5 percent of GDP retained given foreign ownership and good capitalization of most banks.

### Background — evolution and composition of public debt (select facts)
- Pre-COVID growth (2016–2019): growth averaged 4.7 percent (3.4 in per capita terms).
- Public debt decreased from 128.4 percent of GDP in 2016 to 115 percent in 2019.
- Poverty rate in 2019: 10.2 percent (using US$3.2 per day PPP in 2011).
- Total public sector debt rose to 143 percent of GDP at end-2021 from 114 percent in 2019.
- Public sector deficit in 2020: 7.3 percent of GDP.
- As of April 2022, vaccination coverage highlights: around 74 percent of the eligible adult population has received two doses; about 77 percent of eligible teenagers has received at least one dose; boosters have been applied to 15.8 percent of eligible adults.
- Public external debt characteristics:
  - Multilateral institutions (World Bank and African Development Bank) account for about 27.3 percent of external public debt.
  - Average interest rate: about 1 percent.
  - Average maturity: about 30 years.
- Domestic debt at end-2021: accounted for 29 percent of total public debt; Treasury bonds constitute 98 percent of domestic debt with average maturity about 7 years and average interest rate 4.5 percent.
- Holders of domestic government securities: commercial banks 53.6 percent; non-banks 46.4 percent (national social security fund accounts for 22 percent).
- Debt service ratios:
  - Public external debt service to exports: 18.6 percent in 2021.
  - Public external debt service to revenue: 16 percent in 2020 and 22 percent in 2021; projected to average about 18 percent over the medium term.
  - Total public debt service absorbed about 41 percent of revenue and grants in 2022 and projected to climb to about 49 percent in 2024.
- Publicly guaranteed debt: CVE 23.3 billion (11.9 percent of GDP) at end-2021.
- Historical private external debt (IIP-based): about 15.3 percent of GDP at end-2021.
- Participation in G-20 DSSI:
  - DSSI provided around US$15.4 million in debt service relief, including US$2.9 million in interest in 2020.
  - Additional US$45.9 million in debt service relief provided when DSSI extended to end-2021.
  - Portugal agreed to provide additional debt service relief in 2022 of US$1.3m.
  - Repayments to ensure NPV-neutrality will occur over 2022–25 and average about US$15 million per year.

### Outlook and key macroeconomic assumptions
- Projections adjusted to reflect lingering pandemic effects and impact of the Ukraine-Russia crisis.
- Ukraine war increased inflationary pressures and reduced growth prospects in 2022.
- Transmission channels: higher international oil and food prices; Cabo Verde imports about 80 percent of consumption products.
- Authorities announced measures including reduction of VAT on electricity from 15 to 8 percent and an increase in the energy subsidy to poor households from 30 to 50 percent.

*Prepared by the Staff of the International Monetary Fund and the International Development Association   June 3, 2022*

### 13.      The level of GDP has been revised in line with the completion of the of the rebasing of

### 13.      The level of GDP has been revised in line with the completion of the of the rebasing of

### GDP rebasing and current level
- Nominal GDP is about 10 percent higher than previous estimates following rebasing of the national account statistics to 2015 from 2007, reflecting a more accurate measure of the services sector.

### Real GDP growth projections and dynamics
- Real GDP growth contracted by 14.8 percent in 2020 due to the impact of the COVID19 pandemic.
- Real GDP growth is estimated at 7 percent in 2021.
- Projected real GDP growth:
  - 4 percent in 2022 (revised downwards from 6 percent due to the impact of the Ukraine war).
  - 4.8 percent in 2023.
  - Real output projected to converge to the pre pandemic level in 2024.
  - Growth rate projected to decline to about 5 percent through 2027.
  - Over the long run, real GDP growth is projected to stabilize at 4.5 percent.
- Historical context:
  - Long term historical average growth rate (1980-2000) was 4.7 percent and 5.2 percent if 2020 is excluded.
  - Five-year pre-pandemic average growth rate stood at 4 percent.

### Tourism, inflation, and external sector assumptions
- Tourism services:
  - Framework assumes a gradual rebound of the tourism sector to reach the pre pandemic level by 2029.
  - Near-term rebound likely dented by the Russia-Ukraine crisis; medium- to long-term support from increased hotel capacity.
- Inflation:
  - Projected to increase to 6.5 percent in 2022 in line with recent uptick in fuel and commodity prices due to the Russia-Ukraine crisis.
  - Expected to gradually decline to reach 2 percent by 2024 in line with euro area forecast.
- Current account:
  - Baseline assumes a current account deficit of 14.1 percent in 2022 and 6.2 percent in 2023.
  - Projected to decline to about 4.2 percent of GDP in 2027, supported by tourism recovery and steady remittances.
  - International reserves supported at about 5 months of prospective imports.

### Fiscal outlook and financing assumptions
- Fiscal balances:
  - Overall fiscal deficit: 9.1 percent of GDP in 2020; 7.3 percent of GDP in 2021; projected 6.3 percent of GDP in 2022.
  - Fiscal position projected to gradually improve to a surplus of about 1 percent of GDP in 2027.
  - Primary balance projected to improve from a deficit of -5.1 percent of GDP in 2021 to a surplus of about 1 percent of GDP by 2026.
  - Total financing projected to be about 1.2 percent of GDP by 2026.
- Revenue and expenditure measures:
  - Revenue measures include invoicing electronically at least 50 percent of taxpayers for VAT, increasing tobacco tax, and concession of the airport management company.
  - Unwinding of COVID-19 related expenditures from 1.8 percent of GDP in 2021 to 1.6 percent of GDP in 2022.
- Financing mix and debt management:
  - Financing mix emphasizes external concessional financing; domestic debt share remains broadly stable at about 30 percent.
  - Multilateral and bilateral funding for budget support of US$43.8 million 2.2 percent of GDP is expected during 2022.
  - Authorities have drawn down US$32 million (1.5 percent of GDP) of the recent SDR allocations for 2022 and 2023 budgets.
  - Domestic debt profile assumes bond issuance with maturities of at least 4 years accounting for 96 percent of the stock in the medium term.
  - Average interest rates assumed: 1 percent for T-bills, and 4 and 5 percent for short-term and medium to longer-term bonds, respectively.
  - Public investment expected to hover around 4 percent of GDP in the medium term.
  - Private investment expected to remain at about 40 percent of GDP on average over 2022-26.

### Debt sustainability, stress tests, and risk classification
- Debt-carrying capacity:
  - Composite indicator (CI) score for Cabo Verde stands at 3.23, slightly above the threshold of 3.05 for a “strong” rating.
  - CI score contributions: CPIA (45 percent), international reserves (32 percent), world growth (13 percent), remittances (7 percent), country real growth rate (3 percent).
- External public debt:
  - Under the baseline, PV of PPG external debt-to-GDP ratio breaches its threshold only in 2022 and lies below the threshold for the rest of the projection period.
  - Risk of external debt assessed as moderate (improvement from prior assessment of high risk of external debt distress).
  - PV of PPG external debt-to-GDP ratio breaches thresholds for an extended period under stress tests; under an extreme export shock it rises to just under 80 percent in 2024 and remains above the 55 percent threshold up to 2032.
  - PV of PPG external debt-to-exports and debt service-to-export ratios exceed thresholds from 2023-2032 under the export stress test.
- Total public debt:
  - PV of total public debt-to-GDP ratio exceeds the 70 percent benchmark through 2028 under the baseline.
  - Benchmark also breached up to 2029 under standardized bound tests and the tailored combined contingent liabilities test, with combined contingent liabilities shock most severe.
  - Debt outlook particularly vulnerable to growth shocks and contingent liabilities associated with SOEs.
- Risk ratings:
  - DSA classified at “moderate” risk of external debt distress.
  - Overall public debt sustainable but at high risk of debt distress: PV of public debt to GDP remains above its threshold through 2028.
  - Debt service projected to average about 43 percent of revenues over the next five years.
  - Stress tests indicate greatest vulnerability to a growth shock; under such a shock, public debt indicators could follow an explosive path.
  - Risk partly mitigated by support from Portugal, the main bilateral creditor.

### Realism checks and drivers of debt dynamics
- Realism tools:
  - Fiscal adjustment path is ambitious but judged achievable via revenue mobilization, expenditure restraint, and unwinding of COVID-19 expenditures.
  - Proposed primary balance adjustment of about 3.6 percent of GDP over 2022-2024 is in the top quartile of the historical distribution for LICs.
  - Authorities estimate policy measures could increase revenue collections by close to 1 percent of GDP.
  - Realism tools do not signal significant over-optimism on investment or contributions to growth relative to previous DSAs.
- Drivers of debt dynamics:
  - Interest rates expected to contribute positively to PPG external debt accumulation.
  - Price and exchange rate changes projected to exert downward pressure on debt accumulation.
  - Contribution of real GDP growth to public debt reduction in projections is significantly higher than the historical five-year change, reflecting a stronger near-term growth rebound.
  - Public investment’s contribution to real GDP growth remains marginal, reflecting high import content of capital spending.

### Policy recommendations and identified risks
- Policy priorities:
  - Emphasize macroeconomic stability and fiscal discipline to preserve space for public expenditures that support recovery.
  - Prioritize mobilizing additional revenues and continue strategy of only incurring concessional borrowing.
  - Implement growth-enhancing structural reforms: complete SOE reforms (including privatization), promote diversification leveraging the blue economy, reduce informality, and facilitate access to finance for SMEs.
  - Reduce fiscal risk from SOEs and address critical infrastructure gaps.
  - Develop the government securities market and lower costs of domestic borrowing.
- Key risks:
  - Speed of containment of the COVID-19 pandemic domestically and globally.
  - Effects of the Ukraine war, higher oil prices, and supply chain disruptions.
  - High concentration of economic and export activity in the tourism sector increases vulnerability to export and growth shocks.
  - Contingent liabilities from SOEs represent a major downside risk.

*International Monetary Fund — Cabo Verde DSA chapter (selected excerpts).*

### 28.      The authorities agreed with the results of the DSA, and highlighted the challenges

### 1cpvea2022001 - 28.      The authorities agreed with the results of the DSA, and highlighted the challenges

### Authorities' assessment and challenges
- Agreed with the results of the DSA and highlighted challenges associated with reducing the debt stock given the frequency and magnitude of external shocks.
- Noted that the COVID-19 pandemic severely disrupted the planned fiscal consolidation path that would have resulted in a sharp decline in the debt stock.
- Identified structural challenges: heavy dependence on tourism and vulnerability to exogenous shocks, magnified by spillovers from the Ukraine war and the ongoing drought.
- Indicated that already limited fiscal space was exhausted by the health crisis, requiring measures to support the economy.
- Highlighted recent increases in food and fuel prices triggered by the war in Ukraine, which require further interventions to mitigate impacts on the vulnerable.
- Reaffirmed commitment to fiscal consolidation to preserve debt sustainability and reduce the risk of overall debt distress.
- Emphasized the critical role of policies agreed under the new Extended Credit Facility and continued support from development partners, notably the World Bank.
- Welcomed more direct Fund engagement on available policy options given high uncertainties of macroeconomic assumptions, particularly due to the Ukraine war.
- Committed to prudent borrowing policies, strengthening debt management practices, and improving the functioning of the government securities market to enhance long-term debt sustainability.

### Debt and DSA observations
- Noted that liquidity indicators remain comfortably below their respective sustainability thresholds under the baseline scenario, reflecting the high level of concessionality of external debt, as shown in the updated DSA.
- Will undertake strengthened debt management practices and discussions with selected creditors on voluntary debt service relief (such as debt conversions into catalytic investment projects).
- Will mitigate SOE related fiscal risks and resume the privatization agenda, with Cabo Verde Airlines (CVA) privatization process as a priority.
- National account rebasing completed by INE, with IMF TA, pointed to an increase in nominal GDP by about 10 percent compared to previous estimates, leading to an important reduction in debt-to-GDP ratios.

### Program request and financial support
- Authorities seek Executive Board approval of a three-year Extended Credit Facility (ECF) arrangement in the amount of SDR 45.03 million (190 percent of quota).
- Recalled the April 2020 Rapid Credit Facility (RCF) support of SDR 23.7 million (100 percent of quota) used to implement the COVID-19 response plan and reduce fiscal and external financing gaps.
- RCF support helped catalyze additional financing from the World Bank, the African Development Bank, and other development partners.

### Recent economic developments and outlook
- Pre-pandemic growth: the economy was growing at 5.7 percent in 2019 and close to 5 percent annual average in the period of 2016-2019.
- COVID-19 impact: the economy experienced a historical contraction by almost 15 percent in 2020.
- Recovery: real GDP increased by 13.2 percent in the fourth quarter of 2021 (compared to the same quarter of 2020) and 7 percent on average in 2021, driven by rebound in consumption and exports and a well-implemented vaccination program.
- Tourism recovery and FDI in constructions related to tourism contributed to the rebound; strategic public investments in digital, transport, agriculture, water, and energy also supported recovery.
- Growth projection revision: real GDP growth projection for Cabo Verde in 2022 was revised downward from 6 percent to 4 percent due to risks from the war in Ukraine and global inflationary pressures.

### Fiscal policy and revenue measures
- Fiscal performance in 2021 was better than expected; authorities committed to gradual fiscal consolidation.
- Public spending prioritization and rationalization of current expenditures contributed to fiscal improvement.
- Revenue collections still affected by pandemic; support measures included tax deferrals.
- Planned revenue mobilization measures: tax and customs administration improvements, introduction of electronic invoicing, imposition of import duties on previously exempted goods, increasing excise taxes, and implementation of the ECOWAS common external tariff.
- Will continue to preferentially borrow through concessional external financing and improve efficiency of the public investment framework.

### Monetary and financial policies
- Monetary policy will continue to support macroeconomic stability and protect the peg of the Cabo Verdean escudo to the euro.
- Some support measures extended until June 2022 due to the external shock from the war in Ukraine; authorities committed to phasing out these measures.
- Projected reduction in international reserves in 2022, but they should remain in the recommended range of 5 months of prospective imports over the medium-term.
- BCV preparing guidance on prudential treatment of the debt service moratorium and NPL management strategies with the expected end of the moratorium in June 2022; developing a framework for resolution of health crisis related NPLs.
- Additional BCV measures: amending the BCV Law to strengthen autonomy, accountability, and transparency; moving ahead with Basel II implementation; improving monetary and financial sector statistics with IMF TA.

### Structural reforms and social protection
- Authorities engaged in comprehensive structural reforms under PEDS 2022-2026, aligned with “Cabo Verde Ambitions 2030” and the SDGs.
- Priority reforms: facilitate access to finance for micro, small, and medium-sized enterprises; improve labor market functioning; ease legal procedures; cut red tape; expedite judicial processes.
- Attract private investment to tourism, transport, digital, green, and blue economies, water and sanitation, and renewable energy.
- Intend to create a macroeconomic stabilization fund to build buffers against frequent external and weather shocks; Cabo Verde has been continuously affected by droughts since 2017.
- Strengthen and better target social programs, including the national income for inclusion program (RNI); reform national social security system; sign a pact for poverty reduction with development partners aiming to eliminate extreme poverty by 2026.

### Conclusion and commitment
- Authorities fully committed to the IMF-supported program and confident that the three-year ECF arrangement will help cover part of financing needs, support gradual economic recovery, preserve macroeconomic and financial stability, protect the most vulnerable, support fiscal consolidation and debt sustainability goals, and implement the structural reform agenda envisaged in PEDS 2022-2026.

*Source: Statement by Mr. Afonso Bevilaqua, Executive Director for Cabo Verde, and advisors; IMF staff report excerpts.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1cpvea2022001.pdf_