## 1cpvea2023001 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1cpvea2023001 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1cpvea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1cpvea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1cpvea2023001.pdf.json) --- ### Context - IMF Board approved a 36-month ECF arrangement for Cabo Verde in June 2022 with access at 190 percent of quota (SDR45.03 million, about US$63.37 million). - Program objectives: - Strengthen public finances and put debt on a downward path. - Reduce fiscal risks from public enterprises and improve their financial management. - Modernize the monetary policy framework and improve resilience of the financial system. - Raise the growth potential. - Pandemic and external shocks: - Cabo Verde was hit hard by the COVID-19 pandemic; recovery underway supported by tourism rebound. - Spillovers from Russia’s invasion of Ukraine produced double-digit increases in energy and food prices. - Authorities expanded support to most affected households. - Public health: More than 98 percent of the adult population have received at least one vaccine dose with about 86.1 percent fully vaccinated. ### Recent developments and macro performance (H1–Q3 2022) - Growth and activity: - Economy recorded five consecutive quarters of growth through H1 2022. - Real GDP growth: 16.8 percent y/y in Q1 2022 and 17.7 percent y/y in Q2 2022. - Services sector: grew 17.8 percent y/y in the first half of 2022, buoyed by tourism arrivals and increased hotel capacity. - Credit growth: 4.3 percent up to September 2022. - Inflation and wages: - Inflation: 8.5 percent y/y in October 2022 due to higher food, electricity, gas, and transportation costs. - Wages: no public sector wage increases awarded in 2022 as authorities prioritized support for the most vulnerable. - External sector and reserves: - Current account deficit narrowed in H1 2022 due to stronger goods exports, tourism receipts, and remittances. - ECF disbursement of SDR11.26 million (47.5 percent of quota, about US$15 million) boosted reserves. - Gross international reserves increased from €591.3 million at end-2021 to €601.1 million by end-September 2022 (about 5.7 months of prospective imports). - Fiscal developments: - Revenue intake up 31.4 percent y/y at end-September 2022. - Expenditure increased by 6.2 percent over the same period (-2.5 percent in real terms); current expenditure up 7.2 percent; capital investment declined 6.1 percent (low implementation rate). - Third quarter 2022 primary deficit shrank to close to ¼ of its value one year earlier. - Financial sector health: - Regulatory capital to risk weighted assets (CAR): 21.9 percent at end-September 2022 (regulatory minimum 12 percent). - Return on equity: 13.6 percent; return on assets: 1.3 percent. - Non-performing loans (NPLs): increased from 8.1 percent at end-2021 to 8.9 percent at end-September 2022. ### Outlook and risks (2022–27) - Growth and inflation projections: - 2022 real GDP growth revised from 4 to 10.5 percent reflecting stronger-than-anticipated tourism rebound. - 2022 inflation revised from 6.5 percent to 8 percent. - 2023 growth forecast: 4.4 percent. - 2023 inflation forecast: 4.5 percent, broadly in line with the Euro area. - Tourism receipts forecast to reach pre-pandemic levels only in 2025. - Current account deficit forecast to narrow to about 6.8 percent of GDP in 2023. - Fiscal outlook: - 2022 projected improvement in fiscal position compared to program mainly from high nominal growth raising revenues. - Authorities expected to exceed the targeted 1.5 percent of GDP improvement in the primary balance for 2022. - Revenue measures: reduction of tax arrears (VAT, personal, corporate income tax); implementation of 5 percent duty on previously exempted imports; rollout of electronic invoicing system. - Subsidies and targeted support: subsidies on key food items and fuel for the most vulnerable amount to 0.3 percent of GDP. - Wage restraint expected to be maintained over the medium term. - Debt trajectory: - Debt-to-GDP ratio now forecast to decrease from 143 percent in 2021 to 128.1 percent at end-2022 (mainly due to higher nominal growth and improved primary deficit). - Medium-term projections: by 2027 revenues projected to climb to 26.6 percent of GDP; expenditures projected to decline to 27.4 percent of GDP; primary balance to move into a surplus position of 1 percent of GDP; public debt projected to decline to 105.2 percent of GDP (text also notes a projection to 96.8 percent of GDP by 2027 in another section). - Downside risks: - Weakened external demand from major tourism markets. - Further increases in fuel and food prices raising poverty and budgetary pressures. - Resurgence of COVID-19 and lockdowns. - Fiscal risks from SOEs if reforms stall. - Climate-related shocks as key medium- and long-term risk (recent four-year drought highlights water and irrigation vulnerabilities). ### Program performance and conditionality through end-September 2022 - Overall performance: strong despite commodity price shocks and COVID-19 effects. - Targets and benchmarks met: - All Performance Criteria (PCs) and an Indicative Target (IT) met at end-June 2022. - Structural Benchmarks (SBs) for end-June 2022 and end-September 2022 met. - All ITs for end-September 2022 met. - Specific outcomes: - Primary deficit target for end-June 2022 comfortably met. - Targets on gross international reserves, PV of debt, and ceiling on net domestic financing were met. - No payment arrears or accumulation of non-concessional external debt. - Indicative target on social spending met. - Structural reforms implemented up to end-September 2022: - Preannounced schedule of TIM (MIS) and TRM (MTS) auctions published in mid-June 2022. - Quarterly fiscal risk assessment using IMF’s health check tool completed in September 2022. - First quarterly monitoring report on SOE budget execution completed in September 2022. - Disbursements and reviews: - Completion of the first ECF review recommended by staff would release a disbursement equivalent to SDR 11.26 million. ### Program policies and 2023 fiscal framework - 2023 budget and revenue assumptions: - Budget submitted to parliament consistent with program framework (end-December 2022 SB). - Budget assumes revenues about 7.2 billion escudos (12.7 percent) higher than the ECF forecast. - Budgeted revenue increase reflects increased grants (~1 percent of GDP, particularly from China) and property income as the delayed airport concession (1.5 percent of GDP) shifts to 2023. - Additional revenue gains: higher tourist tax rate and settling of accounts (~0.3 percent of GDP); electronic tax invoicing and arrears collection (~0.1 percent of GDP). - Expenditure assumptions: - Capital expenditure budgeted at 4 billion escudos (51 percent) above the ECF forecast. - Current spending 3.2 billion escudos (5.2 percent) higher than ECF forecast, driven by higher goods and services outlays and a moderate salary adjustment between 1 percent and 3.2 percent for public servants at the lower end of the pay scale. - Subsidies expected to increase as authorities provide continued support to the most vulnerable. - Spending increases financed by higher revenues and lower projected interest spending (1.3 billion escudos). - Contingency measures: - Authorities identified contingency measures if the airport concession revenue is delayed or tax revenues underperform. - Contingency measure: withholding 20 percent of budgetary allocation for investment spending and purchase of goods and services (5.3 billion escudos or 2.1 percent of GDP) as allowed by budget law until revenue performance is assured. - Financing composition for 2023: - Net domestic financing lower than originally assumed under the ECF and below legally stipulated 3 percent of GDP (reflects higher revenue base from 2022). - Net external financing accounts for about 60 percent of the financing gap (2.4 percent of GDP or 6 billion escudos) compared with 51 percent under the ECF program (3.2 percent of GDP or 7.3 billion escudos). - Lower external financing under updated assumptions mainly reflects lower projected disbursements on project loans in line with sequencing and upscaling of capital spending. ### Staff views and recommendation - Staff view: authorities demonstrate strong program ownership and commitment as evidenced by strong program performance. - Recommendation: staff recommends completion of the first ECF review, which will release a disbursement equivalent to SDR 11.26 million. --- ### Fiscal forecast, SOE risks, and medium-term reform agenda ### Fiscal forecast and medium-term outlook - Staff’s forecast and the program baseline include higher revenues reflecting the base effect from 2022 and income from the airport concession (agreement signed with the concessionaire). - Expenditure is aligned with the budget; as a result the primary balance is expected to be marginally stronger than previously envisaged under the program. - Medium-term projections (premised on steadfast implementation of agreed policy measures): - By 2027, revenues are projected to climb to 26.6 percent of GDP. - By 2027, expenditures are projected to gradually decline to 27.4 percent of GDP. - The primary balance would move into a surplus position of 1 percent of GDP. - Public debt would decline to 105.2 percent of GDP. - Note: The airport concession agreement must be made effective by end-June 2023 otherwise financial penalties would be incurred (authorities’ indication). ### Debt sustainability and risk of distress - Cabo Verde’s risk of debt distress remains high, though public debt is assessed as sustainable (per June 2022 joint World Bank/IMF DSA). - Factors underpinning sustainability assessment: manageable debt service due to favorable debt structure largely on fixed interest rates, the fixed exchange rate, and adequate reserve levels. ### Reduce fiscal risks from public enterprises and improve their financial management - Fiscal structural reforms under the program are being implemented on schedule, with a targeted agenda on revenue mobilization, SOE and public financial management reforms. - Progress: - Preparation of quarterly fiscal risk assessment reports. - First quarterly monitoring report on SOEs’ budget execution. - Improvements to the annual SOEs report to include comparison of execution of initial budget projection and evaluation against the medium-term plan (SB, end-July 2023). - SOE privatization and restructuring: - The SOE privatization/restructuring plan delayed during COVID-19 is progressing slowly and should be accelerated. - Finalization of the airport concession agreement was delayed until 2023; other privatization initiatives pushed back. - Updated timeline for completion of the privatization process for eleven key SOEs is now 2026. - Cabo Verde airline (TAVC) of particular concern: elevated debt and minimal income; original strategic plan did not generate financing to break even. Authorities expect to unveil an updated business plan shortly and accelerate discussions with strategic partners. - Government provided support to the airline of 10m euros in 2022; the ECF includes a provision for 30m euros during the program period. - Recommendation: Accelerate revitalization and privatization efforts to reduce fiscal drain from SOEs. ### Monetary policy framework and financial system resilience - Monetary policy focus: safeguarding the peg and strengthening the policy framework. - Reserves within BCV target range; recent MPC left reference rates unchanged citing adequate reserves cover and tightening impacts from ending the credit moratorium and adjusting the Long-Term Financing Program. - Staff recommendations: closely monitor reserves and inflation developments and stand ready to adjust policy settings as required. - Unwinding COVID-19 related support: - Gradual unwinding of the Long-Term Financing Program and expiration of the credit moratorium at end-June 2022 considered appropriate. - Adjustment to the Long-Term Financing Program includes: (i) extension of program deadline until June 2023; (ii) reduction of the monthly placement amount from 1,300 to 1,000 million escudos; and (iii) maintenance of the list of assets eligible as collateral. - Banking sector assessments and NPL management: - BCV conducted first phase of comprehensive study of loan losses and provisions at expiration of the credit moratorium (June 2022) covering the two largest banks representing 54 percent of banking sector assets; results expected to be published in December 2022 (SB). - Second phase covering two medium size banks representing 19.1 percent of banking sector assets to be conducted in March 2023. - BCV advancing a common framework for resolution of crisis-related NPLs with a standardized toolkit to be disseminated by December 2022. - AML/CFT and correspondent banking relationships: - Steps being implemented based on GIABA’s 2019 Mutual Evaluation Report recommendations, including establishment in 2020 of a national AML/CFT commission. - Inter-Ministerial Commission created and Executive Committee members appointed; draft regulatory and legislative amendments presented to stakeholders in September 2022. - Structural reforms to support monetary transmission and analytics: - BCV started releasing a preannounced schedule for TIM and TRM auctions (SB, 1st review). - Other reforms: strengthening payment systems, introduction of composite indicators of economic activity (End-June 2023 SB), strengthening near-term forecasting, implementation of central bank digital currency, developing framework for emergency liquidity assistance. - Safeguards implementation: - BCV finalizing draft legal amendments to strengthen decision-making structure, autonomy, accountability and transparency (SB, end-December 2022). - BCV requested Fund technical assistance to enhance transparency in financial reporting; capacity building in internal audit and risk management remains work-in-progress. ### Growth-related reforms, climate, and social protection - Structural reform priorities tied to new five-year development strategy (based on Cabo Verde Ambition 2030): - Key priorities: (i) completing SOE reforms; (ii) facilitating access to finance; (iii) improving the business environment. - Climate pillar: climate change adaptation and mitigation, progress towards 50 percent renewable energy target by 2030, technology parks to support digitalization. - Climate initiatives: - Cabo Verde updated its Nationally Determined Contribution in April 2021 and plans a further update over the near term. - Need to establish a unifying body to prioritize and oversee climate-change initiatives. - Authorities interested in the Resilience and Sustainability Trust (RST); C-PIMA technical assistance mission planned in March 2023. - Support for vulnerable groups: - Additional resources expended on social safety net to mitigate higher prices, targeted food and fuel subsidies implemented. - Social protection fund introduced, financed by the tourism tax, to provide reliable resources to support vulnerable groups. - Staff to coordinate with the World Bank and AfDB on reforms to enhance social protection. --- ### Program implementation, monitoring, and quantitative frameworks ### Performance, targets, and structural benchmarks - PCs and ITs for end-June 2023 and end-December 2023 proposed consistent with revised 2023 framework; indicative targets for end-September 2023 added. - Three new structural benchmarks for end-2023: - Construct a Compliance Risk Management system to allow for optimization of tax revenue collection by end-December 2023. - Submit to parliament the budget for 2024 that is in line with the primary balance commitment under the program. - Increase frequency of stress testing to twice per year (June 2023 and December 2023) and revamp stress testing methodology to include detailed banking data and cyber security risk assessment. ### Financing and capacity to repay the Fund - Program is fully financed for the next 12 months, with strong prospects of full financing for the remainder of the arrangement. - Financing in the first and second year of the ECF comes through Fund support and budget support from development partners and multilateral institutions, including the World Bank and the African Development Bank. - Capacity to repay the Fund: - Cabo Verde’s Fund credit outstanding will peak at 280 percent of quota by 2025. - Credit outstanding would peak at about 3.4 percent of GDP, 9.4 percent of exports, and 12.6 percent of gross international reserves. - Annual repayments to the Fund would peak at 0.9 percent of exports, 1.4 percent of reserves, and 10.4 percent of PPG external debt service. - Risks mitigated by authorities’ strong track record servicing Fund obligations and envisaged policy measures including fiscal consolidation. ### Program risks and mitigation - Risks assessed as moderate, conditional on successful reform implementation and significant reduction of debt stock. - External risks: worsened global outlook, spillovers from the war in Ukraine, lack of export diversification, vulnerability to exogenous shocks. - SOEs remain a source of fiscal risk that could derail debt reduction progress. - Mitigating factors: authorities’ strong track record under the recently completed PCI and strong program ownership. --- ### SOEs, fiscal exposure, and reform imperatives ### SOE size and contingent liabilities - The value of SOE assets: 61 percent of GDP in 2021 and 54 percent at end-Q1-2022. - SOE liabilities: 54.5 percent of GDP in 2021 and 49 percent at end-Q1-2022. - Stock of government guarantees to SOEs: close to 10 percent of GDP at end-2021 and estimated at 8.5 percent at end-Q1-2022. ### Planned actions and governance improvements - Privatizations and restructuring: - Sale of majority shares in the national airline (TACV) to a strategic partner; privatization process commenced in 2019 was aborted and government retook ownership. - Greater private sector participation in maritime inter-island transportation. - Restructuring of ELECTRA to reduce technical and commercial losses and prepare for privatization. - Restructuring of the housing program managed by the IFH to minimize losses and increase transparency. - Government intends to privatize eleven of 33 part-government-owned companies during 2022-26. - Institutional measures: - UASE (State Business Sector Monitoring Unit) responsible for SOE reform framework; developing automated data collection and analytical reporting tools, dashboards, and a portal for communication with SOEs and civil society (deliverables during 2022-2023). - Adoption since Q1-2022 of the IMF’s SOE Health Check Tool. - Provision of consolidated information on financial transactions between the government and SOEs. - Establishment of PARPÚBLICA to manage the state’s corporate investments and IMOPÚBLICA to manage the state’s immovable property. - TACV specifics: - TACV restarted operations with one aircraft in 2022; plans to increase aircraft and flights to Europe, USA and Africa over the next two years to achieve breakeven. - Government plans to provide financing during reorganization to cover the projected financing gap over a period of three years; support included in the ECF program. - Government provided support to the airline of 10m euros in 2022; ECF includes provision for 30m euros during the program period. - Policy imperative: - "It is critical to continue with SOE reform objectives without delay, as delaying the restructuring process could undermine the authorities' development strategy and fiscal sustainability and damage the business environment and the authorities' credibility." --- ### Risk Assessment Matrix — Selected risks, likelihoods, impacts, and policy responses - Intensifying spillovers from Russia’s war in Ukraine - Relative Likelihood: High - Impact if Realized: High - Policy Response: Slow down planned unwinding of policy support while ensuring recovery is well entrenched. - Geopolitical tensions, other disruptions and deglobalization - Relative Likelihood: High - Impact if Realized: High - Policy Response: Create fiscal space through spending review and tax mobilization; prioritize and target public spending to the most vulnerable; diversify the economy; seek additional grants and concessional loans. - De-anchoring of inflation expectations and stagflation - Relative Likelihood: Medium - Impact if Realized: Medium - Policy Response: Take concessional debt with Bilateral and/or Multilateral creditors during high yield period; maintain a large liquidity buffer; stand ready to tighten monetary policy. - Commodity price shocks - Relative Likelihood: High - Impact if Realized: High - Policy Response: Build external buffers; diversify energy usage (renewable energies transition). - Cyber attacks - Relative Likelihood: Medium - Impact if Realized: Medium - Policy Response: Strengthen information security; improve financial regulation and supervision. - Higher frequency and severity of natural disasters related to climate change - Relative Likelihood: Medium - Impact if Realized: Medium/High - Policy Response: Build resilience to weather-related shocks and accelerate growth-enhancing reforms. - Faltering fiscal consolidation efforts / Delays in SOE reforms - Relative Likelihood: Medium/High (faltering consolidation); Medium (delays in SOE reforms) - Impact if Realized: High (faltering consolidation); Medium (delays in SOE reforms) - Policy Response: Unwind temporary measures; advance revenue-enhancing reforms; improve capital expenditure management; reduce fiscal risks linked to SOEs; contain non-priority spending; follow through with SOE reform plans and accelerate structural reforms as soon as feasible. --- ### Program instruments, data reporting, and quantitative targets ### Concessional and non-concessional external debt rules - Ceilings on medium- and long-term, as well as on short-term, concessional external debt constitute quantitative targets. - For program purpose, a debt is concessional if it includes a grant element of at least 35 percent. - Discount rate used for PV calculations: unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). - Program reference rate for six-month USD LIBOR: 2.699 percent (fixed for the duration of the program). - Spreads specified: - Six-month Euro LIBOR over six-month USD LIBOR: -168 basis points. - Six-month GBP LIBOR over six-month USD LIBOR: -80 basis points. - For currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR: 100 basis points. - The Portuguese government’s precautionary credit line in support of the exchange rate peg is excluded from the definition of non-concessional external debt. ### Gross International Reserves (GIR) and arrears - A floor on the stock of gross international reserves (GIR) of the BCV constitutes a quantitative target. - GIR include gold, SDRs, reserve position at the IMF, holdings of foreign exchange, 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. - Program floors for the GIR adjusted downward by cumulative upward deviations in external debt service and cumulative downward deviations in external financial assistance and project and budget loans. - A table on the GIR prepared by the BCV will be transmitted monthly with a maximum delay of four weeks. - Non-accumulation of external payments arrears is a continuous target; data on debt-service payments and external arrears accumulation and payments transmitted quarterly by the DNP within six weeks of the end of each quarter. ### Memorandum item and reporting - Indicative floor on central government social spending applies to expenditures on education, health, and social protection excluding wages and salaries; reported cumulatively with a lag of no more than six weeks from the end-of-period. - Data transmission schedules include exports and imports data quarterly within five weeks; preliminary quarterly balance of payments within six weeks; annual GFSM-type SOE reporting timelines specified. *Source: 1cpvea2023001 (IMF materials).* ### EXECUTIVE SUMMARY ### 1cpvea2023001 - EXECUTIVE SUMMARY ### Context - IMF Board approved a 36-month ECF arrangement for Cabo Verde in June 2022 with access at 190 percent of quota (SDR45.03 million, about US$63.37 million). - Program objectives: - Strengthen public finances and put debt on a downward path. - Reduce fiscal risks from public enterprises and improve their financial management. - Modernize the monetary policy framework and improve resilience of the financial system. - Raise the growth potential. - Pandemic and external shocks: - Cabo Verde was hit hard by the COVID-19 pandemic; recovery underway supported by tourism rebound. - Spillovers from Russia’s invasion of Ukraine produced double-digit increases in energy and food prices. - Authorities expanded support to most affected households. - Public health: More than 98 percent of the adult population have received at least one vaccine dose with about 86.1 percent fully vaccinated. ### Recent developments - Growth and activity: - Economy recorded five consecutive quarters of growth through H1 2022. - Real GDP growth: 16.8 percent y/y in Q1 2022 and 17.7 percent y/y in Q2 2022. - Services sector: grew 17.8 percent y/y in the first half of 2022, buoyed by tourism arrivals and increased hotel capacity. - Credit growth: 4.3 percent up to September 2022. - Inflation and wages: - Inflation: 8.5 percent y/y in October 2022 due to higher food, electricity, gas, and transportation costs. - Wages: no public sector wage increases awarded in 2022 as authorities prioritized support for the most vulnerable. - External sector and reserves: - Current account deficit narrowed in H1 2022 due to stronger goods exports, tourism receipts, and remittances. - ECF disbursement of SDR11.26 million (47.5 percent of quota, about US$15 million) boosted reserves. - Gross international reserves increased from €591.3 million at end-2021 to €601.1 million by end-September 2022 (about 5.7 months of prospective imports). - Fiscal developments: - Revenue intake up 31.4 percent y/y at end-September 2022. - Expenditure increased by 6.2 percent over the same period (-2.5 percent in real terms); current expenditure up 7.2 percent; capital investment declined 6.1 percent (low implementation rate). - Third quarter 2022 primary deficit shrank to close to ¼ of its value one year earlier. - Financial sector health: - Regulatory capital to risk weighted assets (CAR): 21.9 percent at end-September 2022 (regulatory minimum 12 percent). - Return on equity: 13.6 percent; return on assets: 1.3 percent. - Non-performing loans (NPLs): increased from 8.1 percent at end-2021 to 8.9 percent at end-September 2022. ### Outlook and Risks - Growth and inflation projections: - 2022 real GDP growth revised from 4 to 10.5 percent reflecting stronger-than-anticipated tourism rebound. - 2022 inflation revised from 6.5 percent to 8 percent. - 2023 growth forecast: 4.4 percent as economic conditions in main tourism markets weaken. - 2023 inflation forecast: 4.5 percent, broadly in line with the Euro area. - Tourism receipts forecast to reach pre-pandemic levels only in 2025. - Current account deficit forecast to narrow to about 6.8 percent of GDP in 2023. - Fiscal outlook: - 2022 projected improvement in fiscal position compared to program mainly from high nominal growth raising revenues. - Authorities appear on track to exceed the targeted 1.5 percent of GDP improvement in the primary balance for 2022. - Measures supporting higher revenues: reduction of tax arrears (VAT, personal, corporate income tax); implementation of 5 percent duty on previously exempted imports; rollout of electronic invoicing system. - Subsidies and targeted support: subsidies on key food items and fuel for the most vulnerable amount to 0.3 percent of GDP. - Wage restraint expected to be maintained over the medium term. - Debt trajectory: - Debt-to-GDP ratio now forecast to decrease from 143 percent in 2021 to 128.1 percent at end-2022 (mainly due to higher nominal growth and improved primary deficit). - Downside risks: - Weakened external demand from major tourism markets. - Further increases in fuel and food prices raising poverty and budgetary pressures. - Resurgence of COVID-19 and lockdowns. - Fiscal risks from SOEs if reforms stall. - Climate-related shocks as key medium- and long-term risk (recent four-year drought highlights water and irrigation vulnerabilities). ### Program Performance - Overall performance: strong despite commodity price shocks and COVID-19 effects. - Targets and benchmarks met: - All Performance Criteria (PCs) and an Indicative Target (IT) met at end-June 2022. - Structural Benchmarks (SBs) for end-June 2022 and end-September 2022 met. - All ITs for end-September 2022 met. - Specific outcomes: - Primary deficit target for end-June 2022 comfortably met. - Targets on gross international reserves, PV of debt, and ceiling on net domestic financing were met. - No payment arrears or accumulation of non-concessional external debt. - Indicative target on social spending met. - Structural reforms implemented up to end-September 2022: - Preannounced schedule of TIM (Monetary Intervention Securities (MIS)) and TRM (Monetary Regularization Securities (MTS)) auctions published in mid-June 2022. - Quarterly fiscal risk assessment using IMF’s health check tool completed in September 2022. - First quarterly monitoring report on SOE budget execution completed in September 2022. - Disbursements and reviews: - Completion of the first ECF review recommended by staff would release a disbursement equivalent to SDR 11.26 million. ### Program Policies — Key Elements and Fiscal Framework - 2023 budget and revenue assumptions: - Budget submitted to parliament consistent with program framework (end-December 2022 SB). - Budget assumes revenues about 7.2 billion escudos (12.7 percent) higher than the ECF forecast. - Budgeted revenue increase reflects increased grants (~1 percent of GDP, particularly from China) and property income as the delayed airport concession (1.5 percent of GDP) shifts to 2023. - Additional revenue gains: higher tourist tax rate and settling of accounts (~0.3 percent of GDP); electronic tax invoicing and arrears collection (~0.1 percent of GDP). - Expenditure assumptions: - Capital expenditure budgeted at 4 billion escudos (51 percent) above the ECF forecast. - Current spending 3.2 billion escudos (5.2 percent) higher than ECF forecast, driven by higher goods and services outlays and a moderate salary adjustment between 1 percent and 3.2 percent for public servants at the lower end of the pay scale. - Subsidies expected to increase as authorities provide continued support to the most vulnerable. - Spending increases financed by higher revenues and lower projected interest spending (1.3 billion escudos). - Contingency measures: - Authorities identified contingency measures if the airport concession revenue is delayed or tax revenues underperform. - Contingency measure: withholding 20 percent of budgetary allocation for investment spending and purchase of goods and services (5.3 billion escudos or 2.1 percent of GDP) as allowed by budget law until revenue performance is assured. - Financing composition for 2023: - Net domestic financing lower than originally assumed under the ECF and below legally stipulated 3 percent of GDP (reflects higher revenue base from 2022). - Net external financing accounts for about 60 percent of the financing gap (2.4 percent of GDP or 6 billion escudos) compared with 51 percent under the ECF program (3.2 percent of GDP or 7.3 billion escudos). - Lower external financing under updated assumptions mainly reflects lower projected disbursements on project loans in line with sequencing and upscaling of capital spending. ### Staff Views and Recommendation - Staff view: authorities demonstrate strong program ownership and commitment as evidenced by strong program performance. - Recommendation: staff recommends completion of the first ECF review, which will release a disbursement equivalent to SDR 11.26 million. *International Monetary Fund. Executive Summary, Cabo Verde Country Report (1cpvea2023001 - EXECUTIVE SUMMARY).* ### 16. The program’s updated fiscal forecast is marginally stronger than envisaged at program ### 16. The program’s updated fiscal forecast is marginally stronger than envisaged at program ### Fiscal forecast and medium-term outlook - Staff’s forecast and the program baseline include higher revenues reflecting the base effect from 2022 and income from the airport concession (agreement signed with the concessionaire). - Expenditure is aligned with the budget; as a result the primary balance is expected to be marginally stronger than previously envisaged under the program. - Medium-term projections (premised on steadfast implementation of agreed policy measures, including tax administration reforms, improved compliance, and likely implementation of the ECOWAS common external tariff): - By 2027, revenues are projected to climb to 26.6 percent of GDP. - By 2027, expenditures are projected to gradually decline to 27.4 percent of GDP. - The primary balance would move into a surplus position of 1 percent of GDP. - Public debt would decline to 105.2 percent of GDP. - Note: The airport concession agreement must be made effective by end-June 2023 otherwise financial penalties would be incurred (authorities’ indication). ### Debt sustainability and risk of distress - Cabo Verde’s risk of debt distress remains high, though public debt is assessed as sustainable (per June 2022 joint World Bank/IMF DSA). - Factors underpinning sustainability assessment: manageable debt service due to favorable debt structure largely on fixed interest rates, the fixed exchange rate, and adequate reserve levels. ### Reduce fiscal risks from public enterprises and improve their financial management - Fiscal structural reforms under the program are being implemented on schedule, with a targeted agenda on revenue mobilization, SOE and public financial management reforms. - Progress: - Preparation of quarterly fiscal risk assessment reports. - First quarterly monitoring report on SOEs’ budget execution. - Improvements to the annual SOEs report to include comparison of execution of initial budget projection and evaluation against the medium-term plan (SB, end-July 2023). - SOE privatization and restructuring: - The SOE privatization/restructuring plan delayed during COVID-19 is progressing slowly and should be accelerated (MEFP ¶18-19). - Finalization of the airport concession agreement was delayed until 2023; other privatization initiatives pushed back. - Updated timeline for completion of the privatization process for eleven key SOEs is now 2026. - Cabo Verde airline (TAVC) of particular concern: elevated debt and minimal income; original strategic plan did not generate financing to break even. Authorities expect to unveil an updated business plan shortly and accelerate discussions with strategic partners. - Government provided support to the airline of 10m euros in 2022; the ECF includes a provision for 30m euros during the program period. - Recommendation: Accelerate revitalization and privatization efforts to reduce fiscal drain from SOEs. ### Monetary policy framework and financial system resilience - Monetary policy focus: safeguarding the peg and strengthening the policy framework (MEFP ¶23). - Reserves are within Banco de Cabo Verde (BCV) target range; recent MPC left reference rates unchanged citing adequate reserves cover and tightening impacts from ending the credit moratorium and adjusting the Long-Term Financing Program. - Staff recommendations: closely monitor reserves and inflation developments and stand ready to adjust policy settings as required. - Unwinding COVID-19 related support: - Gradual unwinding of the Long-Term Financing Program and expiration of the credit moratorium at end-June 2022 considered appropriate given robust growth and high banking system liquidity. - Adjustment to the Long-Term Financing Program includes: (i) extension of program deadline until June 2023; (ii) reduction of the monthly placement amount from 1,300 to 1,000 million escudos; and (iii) maintenance of the list of assets eligible as collateral. - Banking sector assessments and NPL management: - Preliminary central bank assessment suggests the banking sector is well placed to withstand projected increase in NPLs (MEFP ¶25). - BCV conducted first phase of comprehensive study of loan losses and provisions at expiration of the credit moratorium (June 2022) covering the two largest banks representing 54 percent of banking sector assets; results expected to be published in December 2022 (SB). - Second phase covering two medium size banks representing 19.1 percent of banking sector assets to be conducted in March 2023. - BCV has encouraged prudent restructuring of loans, provided guidance on prudential treatment of moratoria and NPL management strategies, and is advancing a common framework for resolution of crisis-related NPLs with a standardized toolkit to be disseminated by December 2022. - BCV is developing detailed reporting templates for restructured and rescheduled loans and monitoring COVID measures’ impact on asset quality. - AML/CFT and correspondent banking relationships: - Steps being implemented based on GIABA’s 2019 Mutual Evaluation Report recommendations (including establishment in 2020 of a national AML/CFT commission). - Inter-Ministerial Commission created and Executive Committee members appointed; changes enacted to the law reviewing the Penal Code; draft regulatory and legislative amendments presented to stakeholders in September 2022. - Structural reforms to support monetary transmission and analytics: - BCV started releasing a preannounced schedule for TIM and TRM auctions (SB, 1st review); auction schedule and related information pre-announced on BCV website. - Other reforms: strengthening payment systems, introduction of composite indicators of economic activity (End-June 2023 SB), strengthening near-term forecasting, implementation of central bank digital currency, developing framework for emergency liquidity assistance. - Safeguards implementation: - BCV finalizing draft legal amendments to strengthen decision-making structure, autonomy, accountability and transparency (SB, end-December 2022). - BCV requested Fund technical assistance to enhance transparency in financial reporting; capacity building in internal audit and risk management remains work-in-progress. ### Growth-related reforms, climate, and social protection - Structural reform priorities tied to new five-year development strategy (based on long-term plan Cabo Verde Ambition 2030) expected before year-end: - Key priorities: (i) completing SOE reforms; (ii) facilitating access to finance; (iii) improving the business environment. - Climate pillar: climate change adaptation and mitigation, progress towards 50 percent renewable energy target by 2030, technology parks to support digitalization. - Climate initiatives: - Cabo Verde updated its Nationally Determined Contribution in April 2021 and plans a further update over the near term. - Need to establish a unifying body to prioritize and oversee climate-change initiatives, including transparency and accountability mechanisms. - Authorities interested in the Resilience and Sustainability Trust (RST); C-PIMA technical assistance mission planned in March 2023. - Support for vulnerable groups: - Additional resources expended on social safety net to mitigate higher prices, targeted food and fuel subsidies implemented. - Social protection fund introduced, financed by the tourism tax, to provide reliable resources to support vulnerable groups. - Staff to coordinate with the World Bank and AfDB on reforms to enhance social protection. ### Program implementation, financing, conditionality, and risks - Performance and targets: - PCs and ITs for end-June 2023 and end-December 2023 proposed consistent with revised 2023 framework; indicative targets for end-September 2023 added. - Three new structural benchmarks for end-2023: - Construct a Compliance Risk Management system to allow for optimization of tax revenue collection by end-December 2023. - Submit to parliament the budget for 2024 that is in line with the primary balance commitment under the program. - Increase frequency of stress testing to twice per year (June 2023 and December 2023) and revamp stress testing methodology to include detailed banking data and cyber security risk assessment. - Financing: - Program is fully financed for the next 12 months, with strong prospects of full financing for the remainder of the arrangement (Text Table 7 and 8). - Financing in the first and second year of the ECF comes through Fund support and budget support from development partners and multilateral institutions, including the World Bank and the African Development Bank. - Capacity to repay the Fund: - Cabo Verde’s Fund credit outstanding will peak at 280 percent of quota by 2025. - Credit outstanding would peak at about 3.4 percent of GDP, 9.4 percent of exports, and 12.6 percent of gross international reserves. - Annual repayments to the Fund would peak at 0.9 percent of exports, 1.4 percent of reserves, and 10.4 percent of PPG external debt service. - Risks mitigated by authorities’ strong track record servicing Fund obligations and envisaged policy measures including fiscal consolidation. - Program risks: - Risks assessed as moderate, conditional on successful reform implementation and significant reduction of debt stock. - External risks: worsened global outlook, spillovers from the war in Ukraine, lack of export diversification, vulnerability to exogenous shocks. - SOEs remain a source of fiscal risk that could derail debt reduction progress. - Mitigating factors: authorities’ strong track record under the recently completed PCI and strong program ownership. ### Staff appraisal: growth, inflation, banking system, and policy stance - Growth: - Real GDP growth is estimated at 10.5 percent in 2022 as tourism arrivals recover towards pre COVID-19 level. - Economy expected to continue growing in 2023 but at a much slower pace reflecting the worsening outlook for main tourist market. - Inflation and social support: - Inflation remains high and requires close monitoring and targeted measures to support the vulnerable. - Inflation expected to decline in 2023 but remain above the pre 2022 five-year historical average. - Authorities committed to continue supporting vulnerable groups as required. - Risks to the outlook: - Main risks: lower external demand from key tourism markets, further increases in food and fuel prices, re-emergence of COVID-19 and lockdowns, and fiscal risks from SOEs. - Program performance and monetary policy: - Performance under the program was strong and supported by robust growth: fiscal deficit and debt-to-GDP ratio projected to decline more than anticipated at onset of the program; current account deficit narrowed; reserves consistent with target range; reforms implemented on schedule. - All PCs and an ITs met at end-June; SBs for end-June 2022 and end-September 2022 met; all ITs for end-September 2022 were met. - Staff agrees with leaving monetary policy reference rate unchanged and supports unwinding COVID-related support measures, including the moratorium on loans and the liquidity facility. - Banking system resilience: - Banking system appears resilient; BCV’s study of loan losses and provisions at the expiration of the credit moratorium and the proposed common framework for resolution of crisis-related NPLs are welcomed. - Completion and publication of results of the first phase of the comprehensive study on loan losses and provisions (following expiration of the credit moratorium end-June 2022) will guide further necessary steps. *Source: 1cpvea2023001* ### 43. Strong progress must be maintained in advancing the structural reform agenda. The ### 1cpvea2023001 - 43. Strong progress must be maintained in advancing the structural reform agenda. The ### Structural reform progress and program status - Authorities met the SBs on the budget, SOE reforms, and monetary policy well within the program test date. - Early indications show work on advancing reforms for the coming test dates is progressing. - Staff welcomes proposed new reforms on SOEs and fiscal management to be included in the program. - Staff supports the authorities’ request for completion of the first review under the Extended Credit Facility. - The attached Letter of Intent and Memorandum of Economic and Financial Policies (MEFP) set out policies to support program objectives. - "The capacity to repay the Fund is strong and risks to program implementation are manageable." ### Public enterprises (SOEs): status, risks, and planned actions - Key facts on SOE size and contingent liabilities: - "The value of the assets of the SOEs was equivalent to 61 percent of the GDP in 2021 and 54 percent at the end of Q1-2022." - "Their liabilities accounted for 54.5 percent of GDP in 2021 and 49 percent at end-Q1-2022)." - "The stock of government guarantees to SOEs, a contingent liability, was close to 10 percent of GDP at end 2021, and estimated at 8.5 percent at end-Q1-2022." - Recent and planned SOE reform measures: - Sale of majority shares in the national airline (TACV) to a strategic partner (privatization process commenced in 2019 was aborted and government retook ownership). - Introduction of greater private sector participation in maritime inter-island transportation. - Restructuring of ELECTRA to reduce technical and commercial losses and prepare for privatization. - Restructuring of the housing program managed by the IFH to minimize losses and increase transparency. - Planned privatization of other SOEs; government intends to privatize eleven of 33 part-government-owned companies during 2022-26. - Institutional and governance improvements: - UASE (State Business Sector Monitoring Unit) responsible for SOE reform framework; developing automated data collection and analytical reporting tools, dashboards, and a portal for communication with SOEs and civil society (deliverables during 2022-2023). - Adoption since Q1-2022 of the IMF’s SOE Health Check Tool. - Provision of consolidated information on financial transactions between the government and SOEs. - Enhancing annual reports on contingent liabilities and SOE performance; initiating dissemination of quarterly SOE performance reports. - Adoption and publication of a comprehensive ownership policy. - Establishment of PARPÚBLICA to manage the state’s corporate investments and IMOPÚBLICA to manage the state’s immovable property. - TACV (Cabo Verde Airlines) specifics: - TACV restarted operations with one aircraft in 2022, plans to increase aircraft and flights to Europe, USA and Africa over the next two years to achieve breakeven in the near future. - Government plans to provide financing during reorganization to cover the projected financing gap over a period of three years; this support is included in the ECF program. - Authorities seeking best restructuring options based on an appropriate business plan covering at least five years. - Policy imperative: - "It is critical to continue with SOE reform objectives without delay, as delaying the restructuring process could undermine the authorities' development strategy and fiscal sustainability and damage the business environment and the authorities' credibility." - Reforms aim to reduce the State’s role in productive activities, improve competitiveness, potential GDP growth and employment, and contain fiscal risks. ### Fiscal, monetary, and external outlook highlights from figures and tables - Economic recovery driven by significant improvements in the tourism sector, supporting services activity. - International reserves projected to remain adequate reflecting increased FDI and higher remittances. - Headline inflation increased due to higher food, electricity and Gas, and transportation costs. - Current account deficit expected to shrink in 2022 in line with tourism recovery. - Financial account projected to improve reflecting increased FDI. - Tourism arrivals and tourism receipts projected to increase in 2022 but remain well below pre-pandemic levels. - Remittances projected to remain strong in 2022 and an important source of foreign currency supporting reserves. - Fiscal performance projected to improve in 2022 with tax revenues expected to rebound strongly due to acceleration in economic growth. - Expenditures projected to decline reflecting lower current expenditure in part due to the unwinding of COVID-19 related spending. - Net other liabilities projected to increase in 2022 reflecting higher government support to SOEs. - Financing needs expected to decline due to anticipated gains in tax revenues. - At end June 2022 broad money decreased due to continued decline in foreign currency reserves; credit to the economy slowed reflecting gradual phasing out of COVID-19 relief measures. - Central bank lowered the policy rate in response to the COVID-19 pandemic. - Nonperforming loans increased in 2022, in part reflecting the gradual phasing out of the credit moratorium. ### Risk Assessment Matrix: main risks, likelihood, impacts, and policy responses (selected) - Intensifying spillovers from Russia’s war in Ukraine - Relative Likelihood: High - Impact if Realized: High — inflation rise could disrupt recovery in tourism and economic activity, negative impacts on growth and external and fiscal positions. - Policy Response: Slow down planned unwinding of policy support while ensuring recovery is well entrenched. - Geopolitical tensions, other disruptions and deglobalization - Relative Likelihood: High - Impact if Realized: High — supply chain disruptions, tourism deterioration, balance of payments problems, lower FDI, increased inflation, food insecurity and poverty. - Policy Response: Create fiscal space through spending review and tax mobilization; prioritize and target public spending to the most vulnerable; diversify the economy; seek additional grants and concessional loans. - De-anchoring of inflation expectations and stagflation - Relative Likelihood: Medium - Impact if Realized: Medium — higher core yields and risk premia, increased cost of new debt, pressure on foreign reserves. - Policy Response: Take concessional debt with Bilateral and/or Multilateral creditors during high yield period; maintain a large liquidity buffer; stand ready to tighten monetary policy. - Commodity price shocks - Relative Likelihood: High - Impact if Realized: High — worsening current account, higher inflation. - Policy Response: Build external buffers; diversify energy usage (renewable energies transition). - Cyber attacks - Relative Likelihood: Medium - Impact if Realized: Medium — weaker confidence, instability in financial system. - Policy Response: Strengthen information security; improve financial regulation and supervision. - Higher frequency and severity of natural disasters related to climate change - Relative Likelihood: Medium - Impact if Realized: Medium/High — prolonged drought or climate shocks undermine agriculture, GDP growth and inflation. - Policy Response: Build resilience to weather-related shocks and accelerate growth-enhancing reforms. - Faltering fiscal consolidation efforts / Delays in SOE reforms - Relative Likelihood: Medium/High (faltering consolidation); Medium (delays in SOE reforms) - Impact if Realized: High (faltering consolidation); Medium (delays in SOE reforms) — undermining macro stability, return to pre-COVID fiscal and debt sustainability, competitiveness and potential growth. - Policy Response: Unwind temporary measures; advance revenue-enhancing reforms; improve capital expenditure management; reduce fiscal risks linked to SOEs; contain non-priority spending; follow through with SOE reform plans and accelerate structural reforms as soon as feasible. ### Letter of Intent and MEFP highlights (selected) - Letter of Intent dated "December 19, 2022" from the Government of Cabo Verde to IMF Managing Director. - Government requests a disbursement equivalent to "SDR 11.26 million (or 47.5 percent of our quota)." - The MEFP supplements the June 2, 2022 memorandum and defines quantitative criteria, indicative targets, and structural benchmarks through "end-December 2023." - Program objectives include: - Strengthening public finances and increasing fiscal space. - Reducing fiscal risks from public enterprises by strengthening financial management and transparency. - Modernizing the monetary policy framework and strengthening the financial system. - Raising growth potential and building resilience to shocks including climate-related events. - Government commits to transparency, publication of documents, and to provide IMF with all information requested and to consult the Fund on revisions. *Source: 1cpvea2023001 (IMF materials).* ### 1. The economic recovery is underway in 2022 despite the weak external environment. ### 1. The economic recovery is underway in 2022 despite the weak external environment. ### Macroeconomic recovery and outlook - First half growth of 17.2 percent y/y in 2022; Real GDP growth is expected to reach 10.5 percent in 2022 reflecting a stronger than anticipated rebound in the tourism sector. - Inflation increased to 8.5 percent (y/y) in October 2022 due to higher food, electricity, gas, and transportation costs; expected to be 8 percent at end-2022. - Current account deficit is projected to improve relative to the program on account of the strength of the tourism sector and strong inflows of remittances. - In 2023: - Growth is projected to slow to 4.4 reflecting a downward revision in global growth and a return to pre-pandemic levels of exports. - Inflation is projected at 4.5 percent. - The current account deficit narrows to about 6.8 percent of GDP in 2023. - Medium-term projections (2023–27): - Real GDP growth would average 4.9 percent during 2023–27. - By 2027: revenues projected to climb to 26.6 percent of GDP; expenditures projected to decline to 27.4 percent of GDP; primary balance projected at a surplus of 1 percent of GDP. - Public debt projected to decline to 96.8 percent of GDP by 2027. ### Fiscal outlook, 2022–23 - 2022: - Fiscal outlook aided by improvement in revenue associated with the rebound in economic activity. - Revenue gains reflect higher activity, reduced tax arrears (VAT, personal, corporate), implementation of a 5 percent import duty on previously exempted imports, and electronic invoicing. - Revenue over-performance saved via expenditure restraint on non-essential public investment projects and policies to contain wage bill, transfers, and subsidies. - Program targets on the primary balance for 2022 are likely to be exceeded. - 2023 budget highlights: - Budget assumes revenues about 7.2 billion escudos (12.7 percent) higher than the ECF forecast. - Budgeted capital expenditure assumed at 4.7 percent of GDP; capital expenditure plan implies capital expenditure of 4 billion escudos (51 percent) above the ECF forecast. - Current spending is 3.2 billion escudos higher (5.2 percent). - Budgeted revenue increases reflect grants of about 1 percent of GDP (particularly from China), property income from delayed airport concession and Caixa Econónima shifts to 2023, and gains from an increase in the rate of the tourist tax and settling of accounts of about 0.3 percent of GDP. - Capital expenditure implementation dependent on full realization of concession revenue of about 1.5 percent of GDP. - Contingency measures of 2.1 percent of GDP identified to reduce capital spending and some expenditure on goods and services if projected revenue does not materialize. - Primary fiscal deficit projected at 2.5 percent of GDP in 2023. - Budgeted financing needs projected at 4.8 percent of GDP in 2023, slightly lower than 2022 outturn. - Domestic funding under the 2023 budget is in line with the 3 percent of GDP target. - External financing sources include multilateral concessional and partially concessional loans: World Bank (0.7 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 policy and administration measures - Measures introduced in 2022 expected to support higher revenues: - Electronic invoicing covering at least 50 percent of taxpayers for VAT (end-December 2022 SB). - Imposition of a 5 percent import duty on previously exempted goods, which generated a gain of 0.13 percent of GDP with the same expected again in 2023. - Increase in the excise tax on tobacco by 75 percent, with revenue gains of 0.13 percent of GDP in 2022. - Requested CD from the IMF in early 2023 to assist in rationalizing tax expenditures. - Revenue administration improvements to focus on collection of VAT, personal and corporate income tax arrears; complete digitalization of all revenue administration and collection processes. ### Public expenditure, public investment, and cash management - Near-term current spending to remain broadly stable; medium-term path to seek efficiency gains and reduce spending on wages and interest payments. - Public investment program projected to increase as a share of GDP but with strict prioritization of capital expenditure. - Steps to improve public investment management (four-step plan): - Redefine existing 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 management improvements: - Continue bringing all central government accounts into the Treasury Single Account (TSA). - Institute a cash coordination committee to systematically review forecasts. - SIGOF (modern financial management information system) already adopted and leveraged. ### Debt dynamics and debt management - Debt-to-GDP ratio projections: - Decrease from 143 percent in 2021 to 128 percent at the end of 2022, mainly due to higher nominal growth and improved primary deficit. - Decline from 143 percent in 2021 to 96.8 percent in 2027 under the fiscal consolidation plan. - Fiscal consolidation path: - Improvement in primary fiscal balance from a deficit of 2 percent of GDP in 2022 to a zero balance by the end of the program and a surplus of about 1 percent of GDP in 2027. - Overall fiscal deficit decline from 7.3 percent of GDP in 2021 to about 1 percent of GDP over the program horizon. - Debt management measures: - Continue to seek debt service relief and concessional treatment (agreement with Portugal to continue receiving debt service relief in line with the DSSI treatment during 2022). - Update debt legislation in line with 2018 review; implement requirement for internal debt sustainability analysis (DSA) and conduct first internal DSA by January 2023. - Review laws regulating guarantees and institute a guarantee fund financed by beneficiaries of guarantees. - Improve debt reporting and analysis, clearly identify required reports. ### SOE reforms and fiscal risks - Strengthen monitoring and financial management of SOEs to reduce fiscal risks: - Quarterly fiscal risk assessments using IMF SOE health check tool started Q1 2022. - Quarterly monitoring report of SOEs’ budget execution (SB). - Publish quarterly consolidated transaction and financial flows between government and SOEs on individual and aggregate basis. - Improve annual SOEs’ report to include comparison of execution relative to initial budget, evaluation against medium-term plans, and data on government relations (SB). - Cabo Verde Airlines (TACV): - Reorganization and privatization efforts ongoing; TACV started operations with one aircraft in 2022, with plans to increase aircraft and flights to Europe, USA and Africa. - Government to provide financing during reorganization to cover projected financing gap of €30 million (about 1.6 percent of GDP) over a period of three years. - Plan to seek best restructuring options with a business plan covering at least five years. ### Macroeconomic Stabilization Fund and climate/disaster vulnerability - Establishment of a macroeconomic stabilization fund to build buffers against external shocks, including climate-related events. - Natural disaster exposure: - Average economic damage from natural disasters, particularly floods, estimated at US$18 million (1 percent of GDP) per year (World Bank estimate). - Emphasis on strategic alignment, institutional cooperation, and operational coordination across public entities to improve resilience and secure long-term sustainability. ### Monetary policy framework and financial sector resilience - Monetary policy stance: - Continued focus on safeguarding the fixed peg exchange regime and strengthening policy transmission. - Reserves slightly above BCV target range of 5-5½ months of imports; target to continue to be in the range of 5 to 5½ months of prospective imports over the medium-term. - International reserves projected to increase by 38 million euros, 6.5 percent in 2022 before falling slightly in 2023 as global downturn weakens export demand. - BCV gradually unwinding COVID-19 related support given elevated liquidity in the banking system and resumption of economic activity; central bank will closely monitor reserves and inflation and stand ready to adjust policy settings. - Financial sector: - Financial sector is stable, adequately capitalized and liquid. - Banking sector supported credit growth of 4.3 percent up to September, 2022 and expected to reach around 5.3 percent at end-2022. - Banking sector well placed to withstand projected increase in non-performing loans at the end of the credit moratorium. - Strengthening policy tools and analysis: - Support development of money market via pre-announced auctions of Monetary Intervention Securities (TIMs) and Monetary Regularization Securities (TRMs) (SB met at end-June 2022). - Reinforce policy analysis by introducing composite indicators of economic activity and strengthening near-term forecasting (SB). - Develop framework to guide provision of emergency liquidity assistance. - BCV and Ministry of Finance sought World Bank TA for a digital economy assessment and national fintech strategy to support financial technologies, innovation, competition, and lower transaction costs. ### Risks and contingency commitments - Risks tilted to the downside: - Main downside risks: uncertainty about COVID-19 trajectory and spillovers from Ukraine war that could weaken external demand from Cabo Verde’s major tourism markets, dampen growth, increase fuel and food prices, weaken domestic demand, increase households needing safety net support, and put pressure on the budget. - COVID-related lockdowns pose major challenge due to reliance on tourism. - Fiscal risks from insufficient consolidation progress and failure to advance SOE reforms. - Policy commitment: - If macroeconomic outlook deteriorates, government commits to take additional measures in consultation with IMF staff. *Source: IMF staff summary of Cabo Verde economic and policy update as provided in the supplied content.* ### 25. The BCV will closely monitor emerging risks to the banking sector. Available indicators ### 1cpvea2023001 - 25. The BCV will closely monitor emerging risks to the banking sector. Available indicators ### Banking sector resilience, NPLs, and supervisory actions - Available indicators indicate that the banking sector is well placed to withstand the effects of the projected increase in NPLs associated with the end of the credit moratorium in June 2022. - Actions and commitments: - Publish a comprehensive study of loan losses and provisions at the expiration of the credit moratorium by end-December 2022 (SB). - Encourage and facilitate prudent restructuring of loans. - Proactively provide guidance on the prudential treatment of moratoria and NPLs management strategies. - Develop a common framework for bank resolution. - Encourage development of detailed reporting templates for restructured and rescheduled loans and for monitoring the impact of the COVID-19 related measures on the asset quality of banks. - Develop a common framework for the resolution of crisis related NPLs (SB). - Recent improvements in the AML/CFT framework, including the establishment of a national AML/CFT committee and Cabo Verde’s recent exit from the EU list of non-cooperative jurisdictions for tax purposes, have helped preserve correspondent banking relationships. ### AML/CFT effectiveness and risk-based supervision - Plan to further improve AML/CFT effectiveness in line with the recommendations found in the 2019 GIABA mutual evaluation report. - Potential measures include: - Effective risk-based supervision for financial institutions and designated non-financial businesses and professions (DNFBP). - Undertaking the sectorial risk assessment of DNFBPs. ### Financial Sector Development Plan, supervision, and BCV governance - Objectives: - Ongoing modernization of the financial system. - Enhance regulatory and supervisory frameworks to deepen the financial sector, support inclusive and sustainable growth, and preserve financial stability. - Ensure a stable and well-capitalized banking system that can support the recovery by effectively monitoring and supervising the health of the financial system. - Supervisory process enhancements: - Increase the frequency of stress testing to at least two times a year from 2023. - Revamp the stress testing methodology to include detailed banking data and cyber security risk assessment. - BCV Law amendments: - Amending the BCV Law to strengthen decision-making structure, autonomy, accountability and transparency of the central bank in line with the IMF safeguards assessment. - Supported by technical assistance from the IMF, draft amendments to the BCV Law will be submitted to the Ministry of Finance to address identified gaps (SB). ### Basel II Pillar 1 adaptation and BCP self-assessment - Commitment to accelerate work towards the adaption of Basel II Pillar 1. - During the first half of 2023 an evaluation will be undertaken on the implementation of the Basel principles through the BCP Self-Assessment. ### Monetary and financial statistics improvements - Improvements undertaken: - Eliminated discrepancies between the monetary and financial sector survey disseminated by the BCV in its publications and data sent to the IMF by adopting the methodology of the central bank survey compiled for the IMF, based on IMF’s 2016 Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). - 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 to continue with enhancement of data on credit by economic activity using INE’s economic activity classification. ### Broad structural reforms to support private sector-led growth and resilience - PEDS priorities based on Cabo Verde Ambition 2030: - (i) Completing SOE reforms, including through privatization and improving the efficiency of SOEs. - (ii) Reducing informality. - (iii) Facilitating access to finance, particularly for small and medium-sized enterprises. - (iv) Improving the business environment. - Other key priorities: - Climate change adaptation and mitigation including achieving the 30 percent renewable energy target by 2026 and 50 percent by 2030. - Digitalization including the development of technology parks. ### Economic diversification and business environment reforms - Diversification channels: - Within tourism: move towards more integrated resort projects with presence of top hotel brands. - Promote alternative sectors: blue economy, digital economy, industry integrated into regional and global value chains, modernization of the agriculture sector using desalinated water. - Legal and land reforms: - Make legal procedures for businesses easier by reducing waiting times and improving links between businesses and judicial processes. - Digitalize information relevant to land titling to address unclear ownership and facilitate timely settlement of disputes. ### Social protection and poverty reduction initiatives - Recognized challenges: - Poverty and unemployment remain high, particularly in rural areas; trends worsened due to the pandemic and likely affected by rising price levels. - Commitments and programs: - Strengthen social safety nets through improved targeting of social spending. - Continue work with external partners (World Bank and African Development Bank) to better target social programs and sign a pact for poverty reduction with the goal of eliminating extreme poverty by 2026. - Reform the national social security system to align with best practices and evolving national needs. - Protect gains in delivery systems: social registry and the RSI cash transfer program. - Continue support for cash transfers and a program of productive inclusion to empower vulnerable families, ensure food security, support education and health expenses for children, and provide training for labor market inclusion. ### Financing, program monitoring, and review schedule - Program monitoring instruments: - Quantitative performance criteria, indicative targets, and structural benchmarks (Table 1 and 2). - Technical Memorandum of Understanding describes definitions and data provision requirements. - Review schedule: - Second program review: scheduled to be completed by March 2023 (based on end-December 2022 test dates). - Third program review: scheduled to be completed by October 2023 (based on end-June 2023 test dates). - Fourth program review: scheduled to be completed by March 2024 (based on end-December 2023 test dates). - Thereafter, monitoring on a semi-annual basis by the IMF Executive Board. _Italic: Content derived from the Cabo Verde ECF program text in the provided document._ ### 19. Under the program, ceilings on medium and long-term, as well as on short-term, ### 1cpvea2023001 - 19. Under the program, ceilings on medium and long-term, as well as on short-term, ### Concessional External Debt (Quantitative Targets) - Ceilings on medium- and long-term, as well as on short-term, concessional external debt constitute quantitative targets. - Coverage includes budget loans, projects and program loans, and on-lending loans to SOEs in line with the fiscal program. - For program purpose, a debt is concessional if it includes a grant element of at least 35 percent. - Definition and calculation of grant element: - 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). - Exclusions and scope: - Debt rescheduling and debt reorganization are excluded from the limits on concessional external debt. - New concessional external debt excludes normal short-term (less than one year) import-related financing. - Variable-rate debt PV calculation: - For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. - The program reference rate for the six-month USD LIBOR is 2.699 percent and will remain fixed for the duration of the program. - The spread of six-month Euro LIBOR over six-month USD LIBOR is -168 basis points. - The spread of six-month GBP LIBOR over six-month USD LIBOR is -80 basis points. - For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is 100 basis points. - Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added. - The TMU can be updated to reflect benchmark replacements (U.S. Secured Overnight Financing Rate (SOFR); U.K. Sterling Overnight Index Average (SONIA); EURIBOR; and Tokyo Overnight Average Rate (TONAR)) prior to complete phase out, once operationally feasible. - Reporting requirements: - The government of Cabo Verde will consult with Fund staff before assuming any liabilities when uncertain whether the instrument falls under the quantitative target. - 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. ### Non-concessional External Debt Contracted or Guaranteed by the Central Government - Ceilings on medium- and long-term, as well as on short-term, non-concessional external debt constitute quantitative targets. - The zero ceiling on non-concessional external debt is on a continuous basis. - For program purpose, a debt is non-concessional if it includes a grant element of less than 35 percent. - Definition and calculation mirror concessional debt rules: - Grant element = (nominal value - PV) / nominal value, with PV calculated by discounting the future stream of payments of debt service. - 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. - Scope and exclusions: - The quantitative target excludes borrowing from the Fund. - Non-concessional external debt excludes normal short-term (less than one year) import-related financing. - The Portuguese government’s precautionary credit line (the “Portuguese credit line”) in support of the exchange rate peg is excluded from the definition of non-concessional external debt. - Reporting requirements: - The government of Cabo Verde will consult with Fund staff where uncertain whether an 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 (Quantitative Target) - A floor on the stock of gross international reserves (GIR) of the BCV constitutes a quantitative target under the program. - Definition of GIR: - Gross international reserves of the BCV include assets that are readily available (i.e., liquid and marketable and free of any pledges or encumbrances), controlled by the BCV and held for the purposes of meeting balance of payments needs and intervening in foreign exchange markets. - They include 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. - Adjustments to program floors for GIR: - The program floors for the 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 (Continuous Target) - The government will not accumulate any new external payments arrears; this is a continuous target. - Monitoring: - This will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations. - Definition for program monitoring: - External payments arrears are defined as the amount of external debt service due and not paid within the contractually agreed period, subject to any applicable grace period, including contractual and late interests. - Arrears resulting from nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded. - Reporting 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. ### Memorandum Item: Floor on Central Government Social Spending (Indicative) - The indicative floor applies only to expenditures incurred by the central government on plans and programs intended to have a positive impact on education, health, and social protection, excluding the wages and salaries component. - Reporting: - For program monitoring, the data will be 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 - Data transmission schedules: - Data on exports and imports, including volume and prices and compiled by the Director of Customs and the BCV, will be transmitted on a quarterly basis within five weeks after the end of each quarter. - A preliminary quarterly balance of payments, compiled by the BCV, will be forwarded within six weeks after the end of each quarter. - The Statement of Other Economic Flows as defined in the IMF Manual GFSM2001 or GFSM2014 relative to holding gains/losses of the previous year with ASA, Electra, EMPROFAC, ENAPOR, and IFH will be transmitted on an annual basis within three months after the end of the following year (15 months after the closing date). - The consolidated balance sheet of ASA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year will be transmitted on an annual basis within three months after the end of the following year (15 months after the closing date). - Specific reform targets and assessment criteria: - Pre-announce a schedule for TIM and TRM auctions reform target: - Assessed as achieved when the 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 reform: - 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. - Construct a Compliance Risk Management (CRM) system to allow for the optimization of tax revenue collection: - Assessed as achieved when the MOF provides staff with a copy of methodology. - Increase the frequency of stress testing to twice per year: - Assessed as achieved when the central bank provides the findings of the second annual stress test. *Source: CABO VERDE — INTERNATIONAL MONETARY FUND (content unit 1cpvea2023001).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1cpvea2023001.pdf_