## 1cpvea2023002 ## Source details **Canonical URL:** [1cpvea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1cpvea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1cpvea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1cpvea2023002.pdf.json) --- ### Program performance and near-term macro outlook - IMF disbursement reported: 4.50 million (about US$ 6.00 million), bringing total disbursements under the arrangement to SDR 27.02 million (about US$36.23 million). - Cabo Verde’s performance under the ECF-supported program is described as "strong." - 2022 outturns and 2023 near-term outlook: - Real GDP growth (2022): 17.7 percent. - Real GDP growth projected (2023): 4.4 percent (as export growth normalizes). - Inflation projected (2023, annual average): 5.2 percent. - Primary deficit (2022): narrowed to 1.9 percent of GDP. - Total nominal government debt: 2022: 128.1 percent of GDP; 2023: 121.2 percent of GDP. - Current account: improved in 2022; expected to widen in 2023 as exports of goods and services, tourism and remittances grow more slowly than imports. - International reserves: "remained adequate to protect the currency peg." Gross international reserves (end of period, € millions): 629.7 (2022), 626.1 (2023), projected to rise to 1020.7 (€ millions) by 2028. ### Key macroeconomic projections and indicators (selected exact figures) - Real GDP (annual percent change): 2020 -19.3; 2021 6.8; 2022 10.5; SR ECF 1st review Act. 17.7; Proj. 2023 4.4; 2024 4.4; 2025 4.5; 2026 4.6; 2027 4.6; 2028 4.7. - Consumer price index (annual average): 2020 0.6; 2021 1.9; 2022 8.0; 2023 7.9; Proj. 2023 4.5; 2024 5.2; 2025–2028 2.0. - Exports of goods and services (annual percent change): 2020 -58.7; 2021 -7.5; 2022 37.5; 2023 120.6; Proj. 2023 11.4; 2024 3.7; 2025 8.4; 2026 9.3; 2027 9.3; 2028 9.1. - Tourism exports (annual percent change): 2020 -69.1; 2021 -16.4; 2022 47.1; 2023 225.4; Proj. 2023 15.6; 2024 7.7; 2025 9.9; 2026 8.5; 2027 9.3; 2028 9.4. - Imports of goods and services (annual percent change): 2020 -23.2; 2021 0.8; 2022 19.5; 2023 33.7; Proj. 2023 7.9; 2024 7.8; 2025 7.0; 2026 7.5; 2027 6.4; 2028 5.9. - Gross international reserves (months of prospective imports of goods and services): 2021 7.8; 2022 6.0; 2023 6.0; Proj. 2023 5.9; 2024 5.5; 2025 6.1; 2026 6.0; 2027 6.2; 2028 6.3; subsequent projections 6.3 and 6.4. - Government finance highlights (percent of GDP): - Revenue: 2022 23.7; Proj. 2023 21.6; 2024 25.6; 2025 24.6; 2026 24.4; 2027 25.2; 2028 25.5. - Expenditure: 2022 28.2; Proj. 2023 25.7; 2024 30.4; 2025 29.0; 2026 27.7; 2027 27.6; 2028 28.0. - Primary balance: 2022 -2.0; 2023 -1.9; 2024 -2.5; 2025 -2.2; 2026 -1.0; 2027 0.0; 2028 0.0. - Overall balance (including grants): 2022 -4.4; 2023 -4.1; 2024 -4.8; 2025 -4.4; 2026 -3.3; 2027 -2.4; 2028 -2.5. - Public debt metrics: - Total nominal government debt (percent of GDP): 2020 138.5; 2021 144.6; 2022 128.1; 2023 121.2; Proj. 2024 122.4; 2025 112.6; 2026 109.3; 2027 105.6; 2028 101.6; 2029 96.4; 2030 91.3. - Present value of PPG external debt (percent of GDP): 2020 70.3; 2021 57.2; 2022 51.3; 2023 53.5; projected to decline to 44.4 by 2028. - Present value of total debt (percent of GDP, benchmark: 70%): 2020 92.4; 2021 102.9; 2022 90.7; 2023 91.3; projected 87.4 (2024) down to 69.3 (2028). ### Risks, shocks, and outlook vulnerabilities - Inflation increase in 2022: attributed to "the ripple effects of Russia’s war against Ukraine on food, fuel, and transportation costs." - Identified key risks: - Potential lower external demand from major tourism markets. - Weak public enterprises reform implementation. - Climate change shocks (including multi-year drought). - Debt risk: - High risk of overall debt distress; external debt distress risk assessed as moderate. - Debt sustainability contingent on continued concessional financing and successful reform implementation. ### Monetary and financial sector stance - BCV tightened monetary policy to narrow the interest rate differential with the ECB "with a view to protecting the peg." - Monetary policy guidance: "has been appropriate and should remain data dependent and focused on safeguarding the peg." - Financial sector: "remains stable," with increased banks’ profitability and NPLs on a decreasing trend (NPLs: 8.1 percent end-2021 to 7.8 percent end-2022). - Recommended institutional measures: - Improve autonomy, governance, and accountability framework of the central bank. - Strengthen the AML/CFT framework and its effectiveness. - Develop composite indicator of economic activity and strengthen near-term forecasting. ### Fiscal, debt, and structural policy recommendations - Fiscal policy aims: balance "credible growth-friendly fiscal consolidation, preserving debt sustainability, protecting the vulnerable, and investing in future growth." - Key fiscal reforms and actions: - Keep progress in domestic revenue mobilization, including digitalization and measures (tobacco and tourism tax, import duty on previously exempted goods). - Streamline tax exemptions; develop and publish an action plan to reduce tax expenditures (SB end-September 2024). - Increase effectiveness of public investment projects and continue improving debt management. - Reform public enterprises to reduce fiscal risks; publish forward-looking targets with the six largest SOEs (New SB end-June 2024). - Structural reform priorities: - Advance reforms to adapt to climate change and mobilize climate financing to help achieve NDC commitments. - Reduce the cost of doing business, strengthen social safety nets, accelerate SOE reforms, and attract private financing to support Sustainable Development Goals. - Contingency fiscal measures (if one-off airport concession revenue delayed and/or tax revenues underperform): - Withhold 20 percent of budgetary allocation for investment spending and purchase of goods and services (5.3 billion escudos or 1.9 percent of GDP) as permitted by budget law until revenue performance assured. ### Program implementation, conditionality, and institutional context - Performance under the ECF: - All quantitative performance criteria (QPCs) for end-December 2022 were met. - Indicative target (IT) for September was met; IT for December was narrowly missed. - Structural benchmarks (SBs) for end-December 2022 and March 2023 were met. - Authorities requested modification of the performance criterion on the PV of new external debt for end-December 2023 to reflect clarification of data on new borrowing; overall debt profile unchanged. - Exchange rate and nominal GDP: - Exchange rate peg: 110.265 CVE/€ since 1999. - Nominal GDP (billions of Cabo Verde escudos): 2020 181.6; 2021 195.0; 2022 232.7; 2023 244.3; 2024 253.9; projections up to 369.2 by 2028. - Mission and report timing: - Discussions in Praia: May 2–9, 2023. - Report date: June 7, 2023. ### Financing strategy and capacity to repay the Fund - Financing strategy: - Continue reliance on concessional external financing and maintain a zero limit on non-concessional loans. - Financing assurances secured for the next 12 months; strong prospects for full financing for the remainder of the arrangement. - Key financing figures (selected Text Table 4 entries for 2023–25; figures presented in the source): - Total financing needs: 9,828 3.7 11,713 4.1 7,832 2.6 - Domestic Financing (Net) -- Issuance of treasury securities: -- 3,772 1.4 8,277 2.9 1,578 0.5 - External financing (Net): 6,057 2.3 3,436 1.2 6,253 2.1 - Disbursements: 16,663 6.3 12,652 4.5 15,398 5.1 - Of which budget support: 7,126 2.7 3,826 1.3 6,594 2.2 - IMF: 2,813 1.1 1,233 0.4 150 0.2 - World Bank: 1,750 0.7 940 0.3 3,773 1.2 - African Development Bank: 2,205 0.8 1,653 0.6 2,205 0.7 - Note: In 2023 net domestic financing includes SDR's converted to domestic deposits amounting about 0.6 percent of GDP. - Capacity to repay the Fund: - Fund credit outstanding would peak at 280 percent of quota by 2025. - Credit outstanding would peak at about 3.1 percent of GDP, 9.5 percent of exports, and 11 percent of gross international reserves, all in 2024. - Annual repayments to the Fund would peak at 1.2 percent of exports, 1.6 percent of reserves, and almost 11.4 percent of PPG external debt service, all in 2029. - Program risks assessment: Risks to the program are assessed as moderate, conditional on successful reform implementation and continued debt reduction. ### SOE reforms, fiscal risks, and public enterprise program - SOEs: major drain on budget resources; steady progress on SOE reforms is critical. - Planned SOE reforms and transparency measures: - Publish quarterly consolidated transactions and financial flows between government and SOEs (individual and aggregate) (end-July 2023 SB). - Enhance annual SOE reports to include execution vs initial budget and performance vs medium-term plans. - Publish forward-looking targets agreed between Ministry of Finance and the six largest SOEs (New SB end-June 2024). - Restructure around nine SOEs in 2023–26 via privatization, partial sale, concessions, and PPPs (water, electricity, naval services, ports, telecom, air transportation). - Specific SOE: Cabo Verde Airlines (TACV) - TACV started operations with one aircraft in 2022; government plans financing of €30 million (about 1.6 percent of GDP) over three years to cover the projected financing gap during reorganization (included in the ECF program). - Authorities seek a business plan of at least five years and potential strategic partners. ### Energy transition, climate resilience, and financing needs - Energy transition projects and targets: - Installation targets: over 150 MWp of solar PV projects and 60 MW of wind farms; IPPs to contribute about 40 MW; Santiago Pump Storage Plant with 20 MW installed capacity and 150.8 MWh storage. - First megawatt of lithium batteries operational by May 2023. - Target: reach 15 MWp of distributed generation installed capacity by 2030. - Energy efficiency: energy efficiency building code approved; EV targets and charging infrastructure (install 175 charging points by end-2024; public administration fleet 100 percent EV by 2030). - Climate adaptation and investment needs: - Estimated cost to finance adaptation and mitigation actions: around 2 billion euros over the next decade. - This amounts to almost 6.3 percent of GDP per year compared to a planned total annual public investment budget of 3.8 percent of GDP. - Fiscal and institutional frameworks for climate: - Public Investment Management (PIM) overhaul needed: define capital expenditure, develop comprehensive capital investment plan for PEDS II, legal framework for capital project cycle, develop an asset register. - Existing funds and instruments: Dedicated environmental fund (~USD 7 million per year), Sovereign Emergency Fund initial capital €10 million (not yet operationalized), Cat-DDO access US$10 million, National Emergency Fund budgetary allocation around CVE 180 million (US$1.8 million) annually since 2019. - Sustainable financing instruments: Blue bond on Blu-X could generate $3.5 million; prior sustainable bonds totaled $32.5 million. - Policy recommendations: - Produce detailed roadmap for mitigation and adaptation actions, mobilize concessional resources, develop holistic financing strategy aligning public investment with debt sustainability, improve PIM to attract IFI and private financing, and leverage RST/RSF support to catalyze climate financing. ### Data, capacity development, and statistical transparency - Recent CD and TA priorities: - Revenue mobilization, public expenditure efficiency, government finance statistics, fiscal transparency (law and portal), C-PIMA, FPAS, Basel core principles, IFRS implementation for MFIs, bank supervision, national accounts improvements. - Statistical transparency and data gaps: - Cabo Verde participates in e-GDDS since 2004; NSDP established January 2020; metadata mostly last updated in 2003 and 2004. - Priority improvements: national accounts, monetary, external, fiscal data, and expanded public sector debt statistics coverage. - Recommendation: post recently compiled General Government series (compiled and published by end-March 2023 SB) on the NSDP. - CD forward focus: - Domestic revenue mobilization, tax policy, implementation of C-PIMA recommendations, central bank operations and banking supervision, FSSR recommendations, high frequency indicators. *Source: CABO VERDE STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, SECOND REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, AND REQUEST FOR MODIFICATION OF A PERFORMANCE CRITERION (June 7, 2023).* ### 4.50 million (about US$ 6.00 million). This brings the total IMF financial support disbursements ### 1cpvea2023002 - 4.50 million (about US$ 6.00 million). This brings the total IMF financial support disbursements ### Program performance and near-term macro outlook - IMF disbursement reported: 4.50 million (about US$ 6.00 million), bringing total disbursements under the arrangement to SDR 27.02 million (about US$36.23 million). - Cabo Verde’s performance under the ECF-supported program is described as "strong." - 2022 outturns and 2023 near-term outlook: - Real GDP growth (2022): 17.7 percent. - Real GDP growth projected (2023): 4.4 percent (as export growth normalizes). - Inflation projected (2023, annual average): 5.2 percent. - Primary deficit (2022): narrowed to 1.9 percent of GDP. - Debt-to-GDP ratio (2022): "declined significantly" (table: Total nominal government debt 2022: 128.1 percent of GDP; 2023: 121.2 percent of GDP). - Current account: improved in 2022; expected to widen in 2023 as exports of goods and services, tourism and remittances grow more slowly than imports. - International reserves: "remained adequate to protect the currency peg." Gross international reserves (end of period, € millions): 629.7 (2022), 626.1 (2023), with projected increases thereafter up to 1020.7 (€ millions) by 2028. ### Key macroeconomic projections and indicators (selected exact figures from table) - Real GDP (annual percent change): 2020 -19.3; 2021 6.8; 2022 10.5; SR ECF 1st review Act. 17.7; Proj. 2023 4.4; 2024 4.4; 2025 4.5; 2026 4.6; 2027 4.6; 2028 4.7. - Consumer price index (annual average): 2020 0.6; 2021 1.9; 2022 8.0; 2023 7.9; Proj. 2023 4.5; 2024 5.2; then 2.0 for 2025–2028. - Exports of goods and services (annual percent change): 2020 -58.7; 2021 -7.5; 2022 37.5; 2023 120.6; Proj. 2023 11.4; 2024 3.7; 2025 8.4; 2026 9.3; 2027 9.3; 2028 9.1. - Tourism exports (annual percent change): 2020 -69.1; 2021 -16.4; 2022 47.1; 2023 225.4; Proj. 2023 15.6; 2024 7.7; 2025 9.9; 2026 8.5; 2027 9.3; 2028 9.4. - Imports of goods and services (annual percent change): 2020 -23.2; 2021 0.8; 2022 19.5; 2023 33.7; Proj. 2023 7.9; 2024 7.8; 2025 7.0; 2026 7.5; 2027 6.4; 2028 5.9. - Gross international reserves (months of prospective imports of goods and services): 2021 7.8; 2022 6.0; 2023 6.0; Proj. 2023 5.9; 2024 5.5; 2025 6.1; 2026 6.0; 2027 6.2; 2028 6.3; subsequent projections 6.3 and 6.4. - Government finance highlights: - Revenue (percent of GDP): 2022 23.7; Proj. 2023 21.6; 2024 25.6; 2025 24.6; 2026 24.4; 2027 25.2; 2028 25.5. - Expenditure (percent of GDP): 2022 28.2; Proj. 2023 25.7; 2024 30.4; 2025 29.0; 2026 27.7; 2027 27.6; 2028 28.0. - Primary balance (percent of GDP): 2022 -2.0; 2023 -1.9; 2024 -2.5; 2025 -2.2; 2026 -1.0; 2027 0.0; 2028 0.0. - Overall balance (including grants, percent of GDP): 2022 -4.4; 2023 -4.1; 2024 -4.8; 2025 -4.4; 2026 -3.3; 2027 -2.4; 2028 -2.5. - Public debt metrics: - Total nominal government debt (percent of GDP): 2020 138.5; 2021 144.6; 2022 128.1; 2023 121.2; Proj. 2024 122.4; 2025 112.6; 2026 109.3; 2027 105.6; 2028 101.6; 2029 96.4; 2030 91.3. - Present value of PPG external debt (percent of GDP): 2020 70.3; 2021 57.2; 2022 51.3; 2023 53.5; projections decline to 44.4 by 2028. - Present value of total debt (percent of GDP, benchmark: 70%): 2020 92.4; 2021 102.9; 2022 90.7; 2023 91.3; projected 87.4 (2024) down to 69.3 (2028). ### Risks and recent shocks - Inflation increased in 2022 due to "the ripple effects of Russia’s war against Ukraine on food, fuel, and transportation costs." - Identified key risks: - Potential lower external demand from major tourism markets. - Weak public enterprises reform implementation. - Climate change shocks. - The economy remains "vulnerable to internal and external risks." ### Monetary and financial sector stance - The Banco de Cabo Verde (BCV) has started to tighten monetary policy to narrow the interest rate differential with the European Central Bank (ECB) "with a view to protecting the peg." - Monetary policy guidance: "has been appropriate and should remain data dependent and focused on safeguarding the peg." - Financial sector: "remains stable," banks’ profitability has increased, and NPLs are on a decreasing trend. - Recommended institutional measures: improve autonomy, governance, and accountability framework of the central bank; strengthen the AML/CFT framework and its effectiveness. ### Fiscal, debt, and structural policy recommendations - Fiscal policy aims: balance "credible growth-friendly fiscal consolidation, preserving debt sustainability, protecting the vulnerable, and investing in future growth." - Key fiscal reforms and actions highlighted: - Keep progress in domestic revenue mobilization. - Streamline tax exemptions. - Increase the effectiveness of public investment projects. - Continue improving debt management. - Reform public enterprises to reduce fiscal risks. - Structural reform priorities: - Advance ambitious structural reform agenda to adapt to climate change. - Reduce the cost of doing business. - Strengthen social safety nets. - Accelerate public enterprise reforms. - Integrate climate-related considerations into macroeconomic policy and mobilize climate financing to help achieve Nationally Determined Contribution (NDC) commitments. - Reforms to attract private financing to help meet the Sustainable Development Goals. ### Program implementation and institutional context - Program performance details: - All quantitative performance criteria (QPCs) for end-December 2022 were met. - Indicative target (IT) for September was met; IT for December was narrowly missed. - Structural benchmarks (SBs) for end-December 2022 and March 2023 were met. - Authorities requested modification of the performance criterion on the PV of new external debt for end-December 2023 to reflect clarification of data on new borrowing; overall debt profile unchanged. - Operational context: - The Cabo Verdean exchange rate has been pegged to the Euro since 1999 at a rate of 110.265 CVE/€. - Nominal GDP (billions of Cabo Verde escudos): 2020 181.6; 2021 195.0; 2022 232.7; 2023 244.3; 2024 253.9; projections up to 369.2 by 2028. - Mission and report timing: - Discussions in Praia took place during May 2–9, 2023. - Report date: June 7, 2023. *Source: CABO VERDE STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, SECOND REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, AND REQUEST FOR MODIFICATION OF A PERFORMANCE CRITERION (June 7, 2023).* ### 1. Recent Economic Developments ______________________________________________________________ 21 ### 1. Recent Economic Developments ### Context - Cabo Verde experienced average growth of 1.1 percent from 2009–2015 and 5 percent from 2016–19. - Pre-COVID vulnerabilities: debt-to-GDP at 109.3 percent by 2019; high debt levels noted despite other sound fundamentals. - COVID-19 impact: - GDP contracted by 19.3 percent in 2020. - Absolute poverty increased to 31.3 percent in 2020. - Debt-to-GDP rose to 144.6 percent in 2021. - Recovery: - Real GDP growth at 6.8 percent in 2021 and 17.7 percent in 2022. - Poverty fell to 28.1 percent in 2022. - Debt-to-GDP declined to 121.2 percent in 2022. - Strategic context: - Reform priorities: increase private sector productivity tied to tourism, improve SOE performance, reduce internal transport costs. - Reforms incorporated into Strategic Plan for Sustainable Development 2022-2026 (PEDS II). - Next parliamentary elections scheduled in 2026. - IMF engagement: - Progress on 2019 Article IV recommendations noted (Annex III). - IMF Board concluded first review of the Extended Credit Facility (ECF) in January 2023. ### Recent Macroeconomic Developments - 2022 macro performance: - Real GDP growth: 17.7 percent in 2022 (program forecast: 10.5 percent). - Services sector expanded by 73 percent in 2022 (buoyed by tourism arrivals). - Credit growth to the economy: 6.2 percent in 2022. - Average inflation: 7.9 percent at end-December 2022; moderated to 5.6 percent in March 2023 (y/y). - Tax revenues increased by 32 percent in 2022 relative to 2021. - Expenditure grew by 6 percent in 2022. - Primary fiscal deficit narrowed to 1.9 percent of GDP in 2022 from 5.2 percent in 2021. - Gross international reserves: €595.3 million at end-2021 to €626.1 million by end-2022 (about 5.9 months of imports). - ECF disbursement: SDR11.26 million (47.5 percent of quota, about US$15 million). - External sector: - Current account deficit narrowed in 2022 due to stronger goods exports, tourism receipts, and remittances. - External Sector Assessment (ESA) indicates 2022 external position stronger than fundamentals and desirable policies — points to an undervaluation of the exchange rate. - Monetary and financial: - Monetary Policy Committee (MPC) raised policy rate from 0.25 to 1.0 percent in early May 2023. - Regulatory capital to risk weighted assets (CAR): 22.3 percent at end-2022 (regulatory minimum: 12 percent). - Return on equity: 17.4 percent; Return on assets: 1.7 percent. - Non-performing loans (NPLs): decreased from 8.1 percent at end-2021 to 7.8 percent at end-December 2022. - Two largest commercial banks instructed to increase provisions after BCV study as part of end-December 2022 SB. ### Near-term Outlook and Risks - Growth projections: - Real GDP growth projected at 4.4 percent in 2023. - Convergence to potential growth of 4.5 percent per year after 2028. - Inflation and current account: - Inflation projected to moderate to 5.2 percent in 2023 and decline to 2 percent over the medium-term. - Current account deficit expected to widen to about 5.6 percent of GDP in 2023. - Medium-term current account projected to narrow to 3.7 percent of GDP. - Gross international reserves projected to remain at just over 6 months of prospective imports of goods and services. - Key downside risks: - Weakened external demand from major tourism markets. - Reversal in downward trend of fuel and food prices increasing safety-net needs. - Fiscal risks from failure to advance SOE reforms or reduced fiscal consolidation. - Climate risk (notably drought) as a medium-term key risk. - High risk of overall debt distress; continued concessional financing important to limit debt servicing costs. - Upside possibility: - Stronger tourism growth could generate higher overall economic activity. ### Authorities’ Views - Authorities concurred with staff’s medium-term outlook and risks, emphasizing high growth potential tied to recent developments and reform agenda. - BCV viewed projected gross international reserves in months of prospective imports as prudent given external downside risks, particularly developments in Europe affecting tourism and potential global growth weakening. ### Policy Focus Areas - Near-term ECF and medium-term Article IV policy discussions emphasized: - Assessing credible, growth-friendly fiscal consolidation to lower debt vulnerabilities while preserving development policy space. - Reducing fiscal risks from SOEs. - Modernizing monetary policy framework and safeguarding financial stability. - Supporting inclusive, sustainable, and resilient growth and addressing climate challenges. ### A. Strengthen Public Finances to Preserve Debt Sustainability - 2023 fiscal stance: - Primary deficit projected at 2.2 percent of GDP in 2023. - Grants to increase by about 1 percent of GDP (mainly from China). - Property income boosted by airport concession intake delayed from 2022 (1.4 percent of GDP). - Contingency measures if one-off airport concession revenue delayed and/or tax revenues underperform: - Withhold 20 percent of budgetary allocation for investment spending and purchase of goods and services (5.3 billion escudos or 1.9 percent of GDP) as permitted by budget law until revenue performance assured. - Capital expenditure projected to increase from 1.9 percent of GDP in 2022 to 4.2 percent in 2023. - Current spending projected to increase from 23.8 percent of GDP in 2022 to 24.8 percent of GDP in 2023 (driven by higher outlay on goods and services and a moderate salary adjustment). - Financing composition: - Overall financing needs in 2023 projected to broadly match 2022 levels with a shift toward external financing. - Net external financing projected at 2.3 percent of GDP in 2023. - Net domestic financing projected to continue trending downwards (with an increase in 2024 reflecting higher capitalization costs). - Debt outlook: - Debt-to-GDP forecasted to decrease from 121.2 percent in 2022 to 112.6 percent at end-2023 (mainly reflecting higher nominal growth). - Medium-term ECF path: revenues projected to climb to 25.7 percent of GDP by 2028; expenditures decline from 29 percent of GDP in 2023 to 25.9 percent in 2028. - Primary balance projected to move to a surplus of 1 percent of GDP by 2028; public debt projected to fall to about 91 percent of GDP by 2028. - Revenue mobilization: - Broad-based plan includes digitalization of revenue collection, measures implemented (tobacco and tourism tax, import duty on previously exempted goods). - Authorities committed to reviewing tax expenditures and implementing delayed ECOWAS common tariff expected to net up to 1 percent of GDP in 2025. - Two new structural benchmarks (SBs) proposed: - Develop and publish an action plan to reduce tax expenditures, including published estimates of annual tax expenditures in the budget, and undertake phased implementation of the ECOWAS tariff to increase revenue by 1 percent of GDP (end-September 2024). - Implement the action plan in the 2025 budget (end-December 2024). - Expenditure policy: - Strike a balance between current spending containment and increased public capital to support PEDS II investments, especially climate-related. - Current spending projected to decline by about 1 percent of GDP to create space for capital spending. - Wage containment is anchored on stakeholder support to contain public sector wage growth. ### Debt Sustainability Assessment - Joint World Bank/IMF DSA findings: - External debt distress risk: moderate. - Total risk of debt distress: high. - Public debt assessed as sustainable due to favorable debt structure (largely fixed interest rates), fixed exchange rate, and adequate reserve levels. - Policy implication: - Containing debt service costs requires continued concessional funding from multilateral creditors to limit reliance on costlier domestic financing. *Source: 1cpvea2023002 - 1. Recent Economic Developments* ### 17. Financing. Staff discussed the authorities’ borrowing plans and emphasized the need ### 17. Financing. Staff discussed the authorities’ borrowing plans and emphasized the need ### Financing strategy and borrowing mix - Continue adherence to a financing mix that relies on concessional external financing and maintain prudent debt borrowing policies, relying on the zero limit on non-concessional loans (Text Table 4). - Financing assurances secured for the next 12 months, with good prospects of full financing for the remainder of the arrangement. In addition to Fund support, financing in the first and second year of the ECF is being provided through budget support from development partners and multinational development institutions, including the World Bank and the African Development Bank. ### Key financing figures (Text Table 4 — Cabo Verde: Sources of Financing for 2023–25) - Total financing needs: 9,828 3.7 11,713 4.1 7,832 2.6 - Financing sources: 9,828 3.7 11,713 4.1 7,832 2.6 - Domestic Financing (Net) -- Issuance of treasury securities: -- 3,772 1.4 8,277 2.9 1,578 0.5 - External financing (Net): 6,057 2.3 3,436 1.2 6,253 2.1 - Disbursements: 16,663 6.3 12,652 4.5 15,398 5.1 - Of which budget support: 7,126 2.7 3,826 1.3 6,594 2.2 - IMF: 2,813 1.1 1,233 0.4 150 0.2 - World Bank: 1,750 0.7 940 0.3 3,773 1.2 - African Development Bank: 2,205 0.8 1,653 0.6 2,205 0.7 - Program and project loans: 7,686 2.9 8,284 2.9 8,225 2.7 - JICA: 1,076 0.4 2,419 0.8 - OFID: 1,556 0.6 329 0.1 - World Bank (program/project loan line): 2,428 0.9 3,807 1.3 3,248 1.1 - BADEA: 856 0.3 664 0.2 - Kuwait: 356 0.1 2,318 0.8 - Other: 1,414 0.5 1,166 0.4 2,088 0.7 - Onlending loans: 1,851 0.7 543 0.2 579 0.2 - Amortization: 10,606 4.0 9,216 3.2 9,145 3.0 - Sources: Cabo Verdean authorities and IMF staff projections. - Note: 1/ In 2023 net domestic financing includes SDR's converted to domestic deposits amounting about 0.6 percent of GDP. ### Authorities’ views on fiscal strategy and reforms - Agreed with staff’s assessment of Cabo Verde’s medium-term fiscal strategy and the consolidation path. - Stressed need to advance capital projects that would enhance potential growth. - Reiterated commitments under the ECF to identify savings and focus on priority spending, both current and capital, accompanied by firm commitments to domestic revenue mobilization as key to credible fiscal consolidation. - Concerned about fiscal risk from economic impact of climate events and committed to integrating these into fiscal risk analysis. - View improved fiscal transparency as important; welcomed IMF support in preparing the fiscal transparency law and establishing the transparency portal. - Requested capacity development support from the Fund on revenue mobilization, budget frameworks, PIMA, accounting, and debt management. ### Reduce fiscal risks from public enterprises and SOE reform - SOEs are a major drain on budget resources and financing needs; steady progress on SOE reforms is critical. - Reforms to include publication of quarterly consolidated transactions and financial flows between the government and SOEs (individual and aggregate) and improvements to the annual SOEs’ report (end-July 2023 SB). - Annual report enhancements to include comparison of execution relative to initial budget projection, evaluation of performance against medium-term plans, and data on government relations. - Plan to publish forward-looking targets agreed between the Ministry of Finance and the six largest SOEs on improving financial performance and reducing need for central government support (New SB end-June 2024). - Plan to restructure around nine SOEs in 2023–26 via privatization, partial sale, concessions, and PPPs covering water and electricity, naval services, ports, telecom, and air transportation. - Staff urged analysis of non-performing loans (NPLs) from BCV study at end of credit moratorium and implications for government guarantees and fiscal risks. - Authorities plan to request FAD technical assistance to improve PPP framework and risk management within broader PIMA reforms. - Authorities recognize complexity in energy, ports, maritime and air sectors; will use international development partners to package reforms. ### Modernize monetary policy framework and financial system resilience - Monetary policy focus: safeguard the peg, monitor reserves, inflation, and interest differential with the ECB; remain data dependent. - Recent hike in policy rate was appropriate given interest rate differential with the Euro area to mitigate potential currency outflows and ensure peg stability; BCV should be ready to tighten further if warranted. - BCV leveraging Fund CD to improve monetary policy analysis and near-term forecasting (NTF) capabilities; reduced number of MPC meetings per year and approved calendar with pre-announced dates to reduce market uncertainty. - Introduction and ongoing work on composite index of economic activity (CIEA). - Following BCV study of loan loss provisions (SB December 2022), BCV instructed some banks to increase provisioning and developed a standard toolkit to facilitate NPL resolution (SB December 2022). - Staff urged development of detailed reporting templates for restructured/rescheduled loans and NPL monitoring, implementation of foreclosure regulations, and bank engagement on legacy NPL resolution mechanisms. - Authorities advancing financial inclusion and digitalization: mobile payments, internet banking, payment systems upgrades, interoperability of instant payments, strengthened security regulations. - Authorities addressing AML/CFT weaknesses and FSSR recommendations: establishment of national AML/CFT committee; exit from EU list of non-cooperative jurisdictions for tax purposes; approval in 2023 of the 2023-2027 National Strategy for the prevention of ML/TF/PF; BCV strengthening risk-based supervision and sectorial risk assessment of DNFBPs in collaboration with Banco de Portugal. - Government encouraged to enact BCV Organic Law in line with 2022 safeguards recommendations; draft amendments submitted to Ministry of Finance in December 2022 and intended for National Assembly submission during 2023. - BCV adopted International Financial Reporting Standards and approved revised internal audit charter to strengthen independence. ### Raise growth potential and increase climate resilience - Structural reform priorities in five-year development strategy: (i) completing SOE reforms; (ii) facilitating access to finance; (iii) improving business environment; climate pillar targeting 50 percent renewable energy by 2030. - Business environment reforms since 2019 include institutional adjustments led by Prime Minister and Minister of Finance offices; mechanisms to improve access to finance and ICT for SMEs; special funds to support businesses; online tax filing; one-stop-shops for investors. - Social protection: social spending to be protected over medium term, supported by social protection fund financed by tourism tax; authorities plan to eradicate extreme poverty and reduce absolute poverty to about 20.5 percent during PEDS II; steps to enhance targeting regime; collaboration with African Development Bank and World Bank on social safety net reforms. - Climate vulnerability and costs: World Bank estimates average economic damage from natural disasters, particularly floods, costs just under 1 percent of GDP per year. - Recent multi-year drought severely weakened agriculture, challenged water supply, and impacted tourism. - Authorities estimate funding need of at least Euros 2 billion to implement the 10-year action plan. - 2021 NDC focuses on adaptation in water, agriculture, oceans, spatial planning, disaster risk reduction, and health; infrastructure plans include increasing water storage, establishing waste recycling center on Santiago Island, and improving efficient agricultural irrigation. - Energy reforms focused on low-carbon transition, renewable energy, universal electricity access, and energy efficiency; ongoing renewable investment projects to promote decarbonization. - Public Investment Management (PIM) needs overhaul to support climate agenda; priority reforms include: define concept of capital expenditure; develop comprehensive capital investment plan for PEDS II; develop PIM legal framework regulating capital project cycle and public enterprises participation in climate-smart infrastructure; develop an asset register for maintenance funding to safeguard climate-resilient infrastructure. - Funding bottleneck for climate initiatives; authorities seek concessional financing from bilateral and multilateral agencies and private finance (including issuance of blue bonds); expressed interest in RSF funding to crystalize climate plans and catalyze financing. - Authorities signal intent to articulate reform areas and request an RSF program in coming months; emphasize attracting private and concessional public financing, poverty reduction, and investment in human capital. ### Program issues, conditionality, and risks - Performance under the ECF program has been strong. All quantitative performance criteria (QPCs) for end-December 2022 were met (Text Table 6). The indicative target (IT) for September was met and the IT for December on social spending was narrowly missed. Regarding SBs (Text Table 7), the authorities met the ones for end-December 2022 and March 2023. A new set for end-June 2024 PCs and end-March 2024 ITs is proposed. - Additional conditionality set while maintaining a parsimonious approach. New SBs include: - i) Develop and publish an action plan to reduce tax expenditures, including published estimates of annual tax expenditures in the budget to improve transparency, and undertake phased implementation of the ECOWAS tariff, to increase revenue by 1 percent of GDP (end-September 2024). - ii) Implement the action plan in the 2025 budget (end-December 2024). - iii) Building on the July 2023 SB, publish in the annual report on public companies the forward-looking targets agreed between the Ministry of Finance and the six largest SOEs on improving financial performance and reducing the need for central government support (New SB end-June 2024). - Authorities request modification of the PC on the PV of new external debt for end-December 2023 to reflect clarification of data on new borrowing; overall debt profile remains unchanged. - Authorities request the QPC on Net Other Liabilities be treated as a floor instead of a ceiling for easier interpretation in monitoring. *Source: Cabo Verde — IMF staff report (chapter 17: Financing).* ### 39. Cabo Verde’s capacity to repay the Fund is assessed as adequate (Table 8). Fund credit ### 1cpvea2023002 - 39. Cabo Verde’s capacity to repay the Fund is assessed as adequate ### Capacity to repay and Fund exposure - Fund credit outstanding would peak at 280 percent of quota by 2025. - Credit outstanding would peak at about 3.1 percent of GDP, 9.5 percent of exports, and 11 percent of gross international reserves, all in 2024. - Annual repayments to the Fund would peak at 1.2 percent of exports, 1.6 percent of reserves, and almost 11.4 percent of PPG external debt service, all in 2029. - Table referenced: Table 8 (Indicators of Capacity to Repay the Fund, 2023-35). ### Risks to the program and contingency - Overall assessment: Risks to the program are assessed as moderate, conditional on successful reform implementation and continued debt reduction. - Noted risk factors: - Worsened global outlook and spillovers from the war in Ukraine increase program risks. - High risk of overall debt distress remains a concern. - Disaster-related events requiring additional spending to restore services and support affected populations. - Mitigating factors: - Authorities’ strong track record under the previous PCI and the current ECF, indicating strong program ownership. ### Capacity Development (CD) and statistical transparency - CD activities remain closely linked to program priorities (Annex V). - Recent CD included TA to support efforts to: - improve revenue mobilization; - increase efficiency of public expenditure; - improve government finance statistics; - enhance fiscal transparency (legislation and portal); - C-PIMA; - strengthen FPAS; - strengthen implementation of Basel core principles and the International Financial Reporting Standards (IFRS) for MFIs; - reinforce bank supervision and national accounts statistics. - Going forward, CD activities are expected to focus on: - domestic revenue mobilization, tax policy and related institutional reforms; - implementation of C-PIMA recommendations; - central bank operations and banking supervision; - FSSR recommendations; - high frequency indicators. - Statistical transparency and recent developments: - Cabo Verde participates in e-GDDS since 2004 and established a National Summary Data Page (NSDP) in January 2020. - Metadata for data categories posted on the NSDP were mostly last updated in 2003 and 2004. - Current focus: improve quality, coverage, and frequency of national accounts, monetary, external, and fiscal data, and expand coverage of public sector debt statistics. - Recommendation: authorities should consider posting on the NSDP the recently compiled series of General Government data—whose compilation and publication by end-March 2023 was a structural benchmark under the ECF. ### Recent economic developments and outlook - 2022 rebound and near-term outlook: - The economy rebounded strongly in 2022 and the near-term outlook is favorable despite downside risks. - Tourism arrivals have surpassed pre-pandemic levels. - Gross international reserves in 2022 reached 5.9 months of imports and are expected to remain stable around those levels. - The economy remains vulnerable to external shocks that impact tourism activity. - Inflation: - Inflation persists and requires close monitoring. - Inflation is expected to decline in 2023 but remain above the pre-2022 five-year historical average. - Global food and fuel prices transfer rapidly to the economy given the heavy share of imports in consumption. - Authorities committed to continue supporting vulnerable groups as required. ### Fiscal policy, debt, and program performance - Fiscal consolidation: - Staff welcomes authorities’ commitment to the program’s fiscal consolidation path. - Achievement of program targets depends on adhering to tax and other revenue measures and identified contingency spending measures if overall revenues underperform. - Fiscal risks from SOEs and PPPs need close monitoring and mitigating measures. - Delays in SOE reforms could undermine credibility and fiscal sustainability. - Staff encourages continued reduction in the debt-to-GDP ratio to about 91 percent by 2028. - Monetary policy and financial stability: - Monetary policy stance has been appropriate and should remain data dependent to safeguard the peg. - Staff supports the recent increase in the policy rate given relatively high inflation and the interest differential with the ECB. - CBV should remain vigilant and stand ready to change policy stance to support the peg. - Staff commends implementation of CD recommendations to strengthen monetary policy transmission and analytical capacity; encourages submission of amendments to the BCV law to parliament. - Financial stability: improvement in indicators; banks’ profitability increased; NPLs maintained downward trend since 2016 though NPLs increased in 2022 in part reflecting phasing out of the credit moratorium. - Staff urged continued work with banks to facilitate resolution of NPLs. - External position: - Cabo Verde’s external position in 2022 was substantially stronger than implied by fundamentals and desirable policies. - Authorities committed to safeguarding the peg as BCV’s nominal anchor. - Reserves assessed as adequate based on IMF LIC/MIC framework; building strong external buffers remains critical. - Program performance under the ECF: - All QPCs for end-December 2022 were met; IT for September was met; IT for December narrowly missed. - All SBs for end-December 2022 and March 2023 were met. - Staff supports modification of the PC on the PV of new external debt for end-December 2023 and revised definition of the QPC on Net Other Liabilities. - Staff supports completion of the second review under the ECF arrangement and recommends the next Article IV consultation be on the 24-month cycle. ### Structural reform priorities and SOEs - Need for decisive reforms to sustain high, inclusive, and resilient growth; support goals under the PEDS II. - Priority areas: - Clear reform agenda for major SOEs; - Improved connectivity among islands; - Employment and social development; - Strong domestic and dynamic private sector; - Accelerated implementation of climate adaptation measures and improved access to water supplies. - Capital spending to accelerate investments in climate action and seeking support from partners to access financing are critical. - SOE sector details and risks: - SOEs operate in transportation, utilities, housing, and pharmaceuticals; have required substantial government financial support (on-lending, subsidies, capitalization). - Net value of SOEs: 61.8 percent of GDP in 2021 and 52.4 percent at end of Q3-2022. - Liabilities of SOEs: 55 percent of GDP in 2021 and 47.8 percent at end-Q3-2022. - Stock of government guarantees to SOEs: close to 10 percent of GDP at end 2021, estimated at 8.2 percent at end-Q3-2022. - Authorities intend to restructure nine of 33 part-government-owned companies during 2023-2026, including privatization, partial sale, concessions, and PPPs covering water, electricity, naval services, ports, telecom, and air transportation. - Key step highlighted: sale of majority shares in the national airline (TACV) to a strategic partner. *Source: IMF staff estimates.* ### introduction of greater private sector participation in maritime inter-island transportation; (iii) the ### 1cpvea2023002 - introduction of greater private sector participation in maritime inter-island transportation; (iii) the ### SOE restructuring, privatization, and sectoral reforms - Reform measures planned or underway: - introduction of greater private sector participation in maritime inter-island transportation. - restructuring and unbundling of ELECTRA to reduce its high technical and commercial losses and prepare the company for privatization. - restructuring of the housing program managed by the IFH to minimize losses and increase transparency. - privatization of other SOEs. - Policy intent: - Pursue restructuring objectives quickly to avoid undermining the authorities’ development strategy, compromising fiscal sustainability, and damaging the business environment and credibility to pursue robust policies that can help achieve higher, inclusive and more sustainable growth. ### Cabo Verde Airlines (TACV) - Status and government action: - Government recognizes risks posed by Cabo Verde Airlines (TACV) and intends to complete its reorganization. - Following the aborted earlier privatization, the Government is reorganizing the airline and seeking new potential partners. - Under the new plan (delayed), TACV started operations with one aircraft in 2022, with plans to increase the number of aircraft in the next two years and increase numbers of flights to Europe, USA and Africa to achieve breakeven in the near future. - Government plans to provide financing during the reorganization process to cover the projected financing gap over a period of three years and this support is included in the ECF program. - Authorities are seeking the best restructuring options based on an appropriate business plan covering at least five years. - Historical note: - The privatization process, which commenced in 2019, was aborted due to concerns with the strategic partner that resulted in the government having to take over ownership of the airline. ### SOE financial reporting, governance, and transparency improvements - Key reform measures implemented: - adoption of the IMF’s SOE Health Check Tool to strengthen analysis and assessment of fiscal risks from SOEs by the SOEs unit (UASE) (Q1-2022). - provision of consolidated information on financial transactions between the government, individual SOEs and the sector in general to strengthen transparency and facilitate fiscal risk analysis. - enhancing annual reports on contingent liabilities, annual SOE performance and dissemination of quarterly reports on SOEs’ performance. - adopting and publishing a comprehensive ownership policy to help improve ownership and oversight of the portfolio of SOEs. - establishment of PARPÚBLICA as the company managing the state’s corporate investments and IMOPÚBLICA as the company managing the state’s immovable property. ### Risk assessment for largest SOEs (2019–22) — qualitative summary - Observed risk classifications (sampled entries preserved verbatim as presented): - ASAO: Moderate Risk / Moderate Risk / Very High Risk / Moderate Risk / Moderate Risk / Moderate Risk / Low Risk / High Risk / Moderate Risk / High Risk - ELECTRA: Very High Risk (consistent across 2019–22 and multiple indicators) - EMPROFAC: Moderate Risk / Moderate Risk / Low Risk / Low Risk / Moderate Risk / Moderate Risk / Moderate Risk / Moderate Risk / High Risk / Moderate Risk - ENAPOR: Moderate Risk / Moderate Risk / Very High Risk / Moderate Risk / Moderate Risk / Moderate Risk / Moderate Risk / High Risk / High Risk / High Risk - IFH: High Risk / High Risk / Very Low Risk / Very High Risk / High Risk / Very High Risk / High Risk / High Risk / High Risk / High Risk - CVA: Very High Risk (consistent across 2019–22 and multiple indicators) - Sources: Cabo Verdean authorities. ### Implementation of past Fund policy advice — selected points - Fiscal policy and debt sustainability: - Authorities prepared a fiscal consolidation program aimed at reducing debt to 100 percent of GDP by 2023; implementation disrupted by the COVID-19 pandemic. Authorities resumed fiscal consolidation under the ongoing ECF program. The fiscal position improved in 2022 and is projected to strengthen further over the medium-term. - Tax and non-tax revenue target: at 28 percent of GDP. Progress disrupted by COVID-19 and GDP rebasing; at end of 2022, the revenue ratio stood at 21.6 percent. - Expenditures objective: to decline to 30 percent of GDP in 2022 and forward; objective met in 2021 and 2022 due mainly to GDP rebasing and adherence to the approved budget despite strong nominal GDP growth. - Monetary policy: - Measures: BCV preannounces schedule for TRM/TIM auctions; Minutes of the Monetary Policy Committee published after each meeting since July-2019; reduction of the excessively wide overnight interest rate corridor; ongoing work on introduction of a new composite economic indicator. - Financial sector: - NPLs reduced to 7.8 percent at end-December 2022 from 10.4 percent in 2019, despite end of COVID-19 moratorium. - Credit Registration Center platform entered “go-live” in December 2022; banking institutions report monthly; system being fine-tuned for data consistency. - Legal and institutional reforms: - Creation of legal regime and documents for pledges and movable guarantees; movable guarantees register (RGM) expected to be launched in June, 2023. - FATCA/FATF compliance: Cabo Verde is compliant with financial institutions providing required information to US authorities. - Public enterprises: - Privatization of TACV reversed due to the COVID-19 pandemic; authorities developed a modified plan and are seeking potential investors. - Authorities started compiling cash flow information and quarterly monitoring for the 6 largest SOEs since second half of 2019 [to confirm]; privatization process stalled but updated divestment plans have resumed. - New company PAR PUBLICA created to manage public assets; governance structures yet to be set up; a Unit in the MF monitors SOEs and oversees privatization pending full PAR PUBLICA setup. - Structural reforms to improve competitiveness and inclusive growth: - Institutional adjustments led by Prime Minister and Minister of Finance offices. - Mechanisms to improve access to finance and information/communications, special funds, online tax filing, one-stop-shops for investors. - Operationalization of the Sovereign Private Investment Guarantee Fund in 2021. ### External sector assessment — key findings and statistics - Overall assessment: - Cabo Verde’s external position in 2022 is assessed to be substantially stronger than the level implied by fundamentals and desirable policies, pointing to an undervaluation of the exchange rate. - Reserve adequacy: IMF LIC/MIC optimal reserves = 3.6 months of prospective imports of goods and services; actual level in 2022 = 6.1 months; projected medium-term level = slightly above 6 months. - High and negative net international investment position is a vulnerability but partly contained by external liabilities structure (largely FDI and long-term maturity debt). - Policy implication: sustained medium-term fiscal consolidation and structural reforms needed to support improvements in the external position and reduce external liabilities. - Foreign assets and liabilities — end-2022 positions (as presented): - NIIP: -147 (% of GDP) - Gross Assets: 69 (% of GDP) - Debt Assets: 9 (% of GDP) - Gross Liab.: 216 (% of GDP) - Debt Liab.: 3 (% of GDP) - Current account: - 2022 current account balance narrowed to 3.6 percent of GDP deficit, from an annual average deficit of 6.9 percent of GDP during the last 10 years. - Drivers: stronger-than-expected recovery in goods exports, tourism receipts and remittances. - Projection for 2023: current account deficit of 5.6 percent of GDP due to risks (weaker external demand in tourism markets, further price shocks mostly fuel and food, tight financial conditions and slowdown in remittances). - Projection by 2028: CA deficit of 3.8 percent of GDP driven by gradual recovery in tourism and sustained increase in remittances. - EBA-lite and REER model results (Text Table 1 summary): - CA-Actual (2022): -3.6 (in percent of GDP) - Cyclical contributions (from model): (-) 0.6 - COVID-19 adjustors: 0.0 - Natural disasters and conflicts: (-) -0.5 - Adjusted CA: -3.6 - CA Norm (from model): -10.3 - Adjusted CA Norm: -10.3 - CA Gap: 6.7 (and 4.2 in alternative column) - Relative policy gap: 1.4 - Elasticity: -0.3 - REER Gap (in percent): -21.1 (CA model) and -13.2 (REER model) - Note: 1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (6.8 percent of GDP). - Real Exchange Rate: - Over 2015-2020 average annual depreciation: less than 1 percent. - 2022 REER remained broadly unchanged compared with 2021. - REER model suggests an undervaluation of about 13.2 percent. - Capital and financial accounts: - Net financial account balance in 2022: less 3.9 percent of GDP, compared to an estimated 8.6 percent of GDP in 2021 (slowdown in net official borrowing). - Projection: net capital and financial flows expected to trend downwards and stabilize around 3 percent of GDP; overall balance of payments projected to record surpluses starting in 2023. - FX intervention and reserves: - Gross international reserves increased by €30.8 million in 2022 to €626.1 million at end-December, equivalent to 5.9 months of prospective imports of goods and services. - ECF disbursement: SDR11.26 million (47.5 percent of quota, about US$15 million) contributed to reserves. - Staff’s medium-term projections: reserves around 6.5 months of prospective imports of goods and services. - LIC/MIC framework optimal reserves: about 3.6 months; staff notes need for higher reserves given vulnerabilities and need to protect the peg. ### Capacity Development (CD) strategy — priorities, objectives, and challenges - Strategic alignment: - CD priorities aligned with authorities’ medium-term development strategy (PEDS II) to raise broad-based growth, enhance resilience to shocks and support macroeconomic stability. - CD focuses: strengthen revenue mobilization; increase efficiency in public expenditure; reduce fiscal risks; strengthen monetary policy transmission mechanism; improve collection and dissemination of macroeconomic and financial statistics. - Implementation context: - Cabo Verde is a high-intensity CD user with relatively appropriate institutional capacity and good track record of implementing TA recommendations. - Authorities’ commitment to CD recommendations is good but hampered by limited administrative capacity and staffing. - CD strategy aims to integrate CD recommendations with policy advice and coordinate with IMF CD departments, AFRITAC West 2, and other providers; CD also to support climate-related reform measures where appropriate. - Main CD priorities, objectives, and challenges (selected entries): - Revenue administration: - Objectives: Improve customs administration core functions; strengthen management and governance at customs; enhance compliance with tax obligations; improve quality of tax audits and inspections; continue DNRE digitalization; enhance compliance risk management; revamp tax exemptions regime. - Challenges: Staffing; lack of structured coordination between tax and customs areas. - Tax Policy: - Objectives: Rationalization of tax incentives; identification of new potential revenue sources; ensure effectiveness, efficiency, and equity of incentives; creation of a Tax Policy Unit within the Ministry of Finance. - Challenges: Institutional and staffing constraints. - Public Financial Management: - Objectives: Improve integration of assets and liabilities management framework; improve coverage, quality and access to fiscal reporting; improve budget execution and control; strengthen identification, monitoring and management of fiscal risks; increase efficiency in public investment management (PIM); follow up CD to implement C-PIMA recommendations; enhance public expenditure management (PFM). - Challenges: Staffing constraints. - Real Sector Statistics: - Objectives: Strengthen compilation and dissemination of macroeconomic and financial data; complete the GDP rebasing. - Challenges: Staffing constraints. - Debt Management: - Objectives: Enhance analysis and management of public debt. - Challenges: Staffing constraints. - Central Bank Operations: - Objectives: Improve economic analysis and forecasting capacity; improve reserves management; enhance effectiveness of monetary policy implementation and central bank governance structures. - Challenges: Staffing constraints. - Banking supervision and financial stability: - Objectives: Strengthen bank and non-bank supervision processes and implement risk-based supervision; follow up 2022 FSSR road map and recommendations; implement IFRS. - Challenges: Staffing constraints. *Source: Cabo Verde — IMF staff report excerpts as provided in the supplied content.* ### Annex VI. Strategic Plan for Sustainable Development 2022–26 ### Annex VI. Strategic Plan for Sustainable Development 2022–26 (PEDS II) ### Overview and Purpose - PEDS II represents the first step towards achieving the Cabo Verde Ambition 2030 Agenda following the Covid-19 pandemic. - The strategy sets out how Cabo Verde plans to overcome challenges to sustainable development by: - supporting the economy through development of internal land, sea, air and digital connectivity to promote mobility and integrate the islands' market with the rest of the world; - taking advantage of the demographic transition and demographic dividends, reducing the exclusion of youth to a minimum, and promoting social development; - fostering territorial cohesion by continuing to promote an effective State; - making the diaspora a centrality, increasing Cabo Verde's international reputation, promoting regional integration and the dynamic insertion of Cabo Verde in the world economy. ### Financing and Investment Needs - PEDS II will require financing for development. - An expansion of public investment is needed to make sustainable development possible in the context of a Middle-Income Country. - Climate change finance, in addition to development finance, is critical given the strong correlation between climate change adaptation and mitigation and sustainable development. ### Major Pillars of PEDS II - Economy: maintaining the economic recovery, fiscal consolidation, and sustainable growth. - Environment: fostering territorial cohesion, urban quality and sustainability, environmental sustainability, climate action and resilience, and biodiversity and geodiversity. - Social: promoting social development through human capital, inclusion and mobility, reduction of inequalities, eradication of extreme poverty and gender equality. - Sovereignty: consolidating national sovereignty, deepening the appreciation of democracy, the Diaspora, and the international prestige of Cabo Verde. ### Coordination, Monitoring, and Implementation - The authorities plan a coordination mechanism and monitoring and evaluation system for implementation. - The process is led by the Prime Minister and the different branches of the Executive, with a special role for the Ministry of Finance. - Other stakeholders will be part of coordination and implementation through different Working Groups, the Budget Support group with international partners, and CSOs. ### Key Risks to Implementation - External uncertainties linked to the war in Ukraine and the economic crisis created by the pandemic. - Country-specific risks, mainly fiscal risks, including factors that could cause the budget deficit and other fiscal variables to be worse than expected. - Risk of debt distress stemming from contingent liabilities associated with the SOEs, City Councils, Public-Private Partnerships (PPPs), the National Institute of Social Security and natural disasters. *Source: Annex VI. Strategic Plan for Sustainable Development 2022–26 (PEDS II).* ### 15. Energy transition and efficiency are being built into the operations of public corporations. ### 15. Energy transition and efficiency are being built into the operations of public corporations. ### Energy transition projects and public corporations - Public corporations (ELECTRA and ENAPOR) are implementing investment projects aligned with the electricity master plan (2018-2040). - Projects include: - Investments in the hydraulic energy storage system. - Thermal generation in the island of Sal of 15 MW. - Pure pumping project on Santiago Island. - ENAPOR initiatives: - Planning to supply electricity to docked ships (OPS) in Porto Grande’s cruiser terminal construction (recommended by the World Port Climate Initiative). - Participation in the green port initiative supporting low consumption bulbs and photovoltaic energy in ports. - Airports concession with Vinci Airport includes a proposal to increase renewable assets’ capacities by 8 percent by the end of this decade through investments in wind turbines and solar panels. ### Cabo Verde: Renewable Energy Plan (Box 1) - Wind and Solar Independent Power Producers (IPPs): - Installation of over 150 MWp of solar PV projects and 60 MW of wind farms. - Ongoing projects from independent power producers to contribute about 40 MW. - Santiago Pump Storage Plant (PSP): - Installed capacity of 20 MW and energy storage capacity of 150.8 MWh. - Energy Storage Systems (ESS): - Installation of utility-scale energy storage systems across all the islands. - The first megawatt of lithium batteries will become operational by May 2023. - Distributed Generation: - Public funding to encourage microgeneration for self-consumption. - Target: reach 15 MWp of installed capacity by 2030. - Energy Efficiency: - Approval of an energy efficiency building code and establishment of minimum energy performance standards. - Active promotion across buildings, appliances, industry, and tourism, and improving access to clean cooking technologies. - Brava Sustainable Island: - Investments in wind and solar power plants, energy storage facilities, and smart grid systems. - Electric Mobility: - Transition of the public administration fleet to electric vehicles by 2030. - Funding secured for rebates for electric vehicles, charging infrastructure, and electric bus demonstration projects. - Grid Reinforcement and Smart Grid Road Map: - Modernization of the grid, integration of SCADA/EMS/DMS systems, and deployment of smart meters to manage high renewable energy penetration. ### Advances in energy efficiency and electric mobility - Electric mobility policy approved in 2018 aims to gradually replace combustion engine vehicles with electric vehicles (EVs). - Install 175 charging points by the end of 2024. - Target of 5 percent of electric vehicles (timeframe implied by the policy). - Complete replacement of all vehicles equipped with thermal engines (VT) for EVs targeted for 2050. - National recharge infrastructure expected to be fully implemented by 2030. - Public administration targeting a fleet of 100 percent EV by 2030. - Other energy efficiency milestones: - Migration to more economical fuels completed in 2016. - Replacement of traditional public lighting with LED lamps. - Introduction of smart meters and installation of modern laboratories for checking meters and controlling measurements. ### Adaptation actions in agriculture, water, fisheries, and infrastructure - Agriculture: - Mitigation and drought resilience program includes equipment and installation of solar panels for existing wells and desalination plants. - Fisheries: - 2022 fisheries strategy includes a climate component. - Water and sanitation: - Strategies being updated to align with NDC mitigation and adaptation targets. - Projects include increasing water storage capacity, creating an organic waste recycling center on Santiago Island, and improving water availability for agriculture via efficient irrigation systems. - Roads and public assets: - Estradas de Cabo Verde (ECV) procured a road resilience study (still in production) to identify network vulnerabilities. - Cabo Verde Infrastructure (ICV) undertaking a survey of public assets including climate vulnerability; expectation to georeference surveyed assets with support from the National Institute of Territorial Management (INGT). - Disaster risk and planning: - 2018 ENRRD implemented instruments and policies for disaster risk reduction. - 2020 National Policy on Land Use Planning and Urbanism (PNOTU) introduces resilience and climate change as guiding principles. - Decree-Law no. 61/2018 requires mapping of disaster risks and consideration of disaster risk in territorial planning instruments. - Tourism Management Plans (POT) for coastal areas and adjacent sea are being developed. ### Coordination, institutional frameworks, and fiscal risk management - Climate coordination mechanisms: - Inter-ministerial Committee for Climate Change created in 2009. - Inter-ministerial Coordination Committee for Climate Funds set up in 2019. - Environment and Climate Action Council created in March 2023 to pre-screen climate project ideas. - Fiscal risk management: - In July 2018, a Risk Management Service was created within the Treasury Department of the Ministry of Finance (MOF) to manage operational fiscal risks, including disaster and climate-related shocks. - In 2022, a high-level fiscal risk coordination committee was created to manage fiscal risks associated with climate and disaster risk. - Supported by the World Bank, the Ministry of Finance is conducting long-term quantitative modeling of fiscal risk from natural disasters; outcomes expected to be included in the 2024 fiscal risk statement. ### Financing climate actions: costs, instruments, and gaps - Estimated cost to finance adaptation and mitigation actions: around 2 billion euros over the next decade. - This amounts to almost 6.3 percent of GDP per year compared to a planned total annual public investment budget of 3.8 percent of GDP. - Domestic and existing funds: - Dedicated environmental fund generates about USD 7 million per year (mainly from taxes on plastics) and is likely to be depleted with planned end to plastics imports. - Authorities considering establishing a new Climate and Nature Fund with World Bank support. - Public financing mechanisms and reserves for disasters: - Sovereign Emergency Fund (Fundo Soberano de Emergência (FSE)): - Offshore fund created in 2019 with an initial capital of €10 million and managed by the Bank of Portugal. - Since creation, the Fund has not been operationalized to finance capital post-disaster expenditures. - Catastrophic Deferred Drawdown Option (Cat-DDO): - Accessed under the 2019 World Bank Disaster Risk Management Development Policy Financing for US$10 million. - Annual budget provisional allocation for “unforeseen and unavoidable” expenditures (dotação provisional) set at a maximum of 2 percent of ordinary fiscal revenues; in 2021-2022 it was used to cover recurrent expenses not related to disasters and climate risks. - National Emergency Fund (Fundo Nacional de Emergência (FNE)): - Aims to cover recurrent emergency and recovery expenditures. - Funded through a defined annual budget allocation set at 0.5 percent of non-earmarked revenues. - From 2019 onwards, FNE has received an annual budgetary allocation of around CVE 180 million (US$1.8 million). - Key challenge in insuring government assets: lack of an inventory of public infrastructure assets and values. - Sustainable and private financing: - Blue bond launched on the Blu-X sustainable finance platform in January 2023: - First IPO listed on Blu-X and could generate $3.5 million in private finance. - Proceeds to support microentrepreneurs, startups, and SMEs in coastal communities. - Previous sustainable bonds: four bonds totaling $32.5 million issued through partnership between Cabo Verde Stock Exchange (BVC) and UNDP under the integrated national financing framework (INFF). - Authorities exploring private sector financing modalities, including: - Support for development of private producers of renewable energy. - Exploration of large scale PPP projects, particularly in the energy sector. - World Bank is preparing a DPF with heavy focus on building resilience to climate, expected to provide additional funding and catalyze increased financing. - Financing gap: - Remains large and is a key obstacle to implementation of ambitious climate investment plans. ### Conclusions and policy recommendations - Progress and needs: - Cabo Verde has an ambitious climate agenda with advances in renewable energy and energy efficiency supported by reforms. - The public investment management framework needs a revamp to better support climate objectives. - Recommended actions: - Conduct a careful assessment of mitigation and adaptation actions and produce a detailed roadmap for achieving objectives. - Clearly outline public and private sector roles and design reforms to reduce bottlenecks and facilitate greater private sector participation and funding. - Develop a holistic financing strategy that mobilizes concessional resources and aligns public investment with debt-sustainability. - Improve investment planning and the public investment management system to create concrete, well-structured investment initiatives that can attract support from IFIs and the private sector. - Leverage potential RST support to implement comprehensive reforms, provide financing, and unlock additional resources to advance the climate agenda. *Source: 1cpvea2023002 - 15. Energy transition and efficiency are being built into the operations of public corporations.* ### 1. The economy rebounded in 2022 reflecting a faster than expected turnaround in the ### 1cpvea2023002 - 1. The economy rebounded in 2022 reflecting a faster than expected turnaround in the ### Economic performance and external sector - Real GDP growth in 2022: 17.7 percent. - Tourist arrivals in 2022: surpassed pre-pandemic levels (textual finding). - Average inflation at end-December 2022: 7.9 percent, driven by higher food, electricity, gas, and transportation costs reflecting the impact of the war in Ukraine. - Inflation in March 2023 y/y: 5.6 percent. - Current account: deficit improved in 2022 relative to the program due to strong tourism, strong FDI, and inflows of remittances. - 2023 projections: - Growth: 4.4 (text: "growth is projected to moderate to 4.4"). - Inflation: 5.2 percent. - Current account deficit: about 5.6 percent of GDP in 2023. - Reserves developments: - Projected increase in international reserves in 2023: 69.9 million euros, an 11.6 percent increase from the outcome of 2022. - Equivalent to 6.1 months of imports of goods and services (2023 projection). - Near- to medium-term reserve target: 5½–6 months of prospective imports. ### Fiscal outcomes and public finances - Revenue and primary balance 2022: - Fiscal position improved in 2022 aided by increased revenue associated with the rebound in economic activity. - Primary balance target for 2022: exceeded (revenue over-performance saved). - Revenue measures contributing to 2022 performance: - Efforts to reduce tax arrears on VAT, personal, and corporate income taxes. - Implementation of the 5 percent import duty on previously exempted imports. - Ongoing implementation of the electronic invoicing system. - Public debt and trajectory: - Public debt-to-GDP ratio: decreased from 144.6 percent in 2021 to 121.2 percent in 2022 (text also references 121.1 percent in 2022 in another paragraph). - Program projection: debt-to-GDP ratio declining from 121.1 percent in 2022 to 91.1 percent in 2028 (paragraph 8). - Longer-run projection: public debt would decline to about 85 percent of GDP (paragraph 6). - Fiscal targets and medium-term outlook: - Improvement in primary fiscal balance from a deficit of 1.9 percent of GDP in 2022 to a zero balance by the end of the program and a surplus of 1 percent of GDP in 2028. - Overall fiscal deficit: decline from 4.1 percent of GDP in 2022 to a broadly balanced position over the same period. - By 2028: revenues projected to climb to 25.7 percent of GDP and expenditures projected to decline to 25.9 percent of GDP; primary balance about 1 percent of GDP. - 2023 budget execution and financing: - Q1 2023 tax receipts: increased by 24 percent and were above the indicative target under the program. - Capital expenditure budgeted at 4.2 percent of GDP (2023) — started off slowly but expected to accelerate in Q2. - Projected financing needs in 2023: 3.7 percent of GDP (compared to 4 percent at the first review). - Domestic financing in 2023 projected at 1.4 percent of GDP (below legal rule of 3 percent of GDP). - Expected external financing composition: World Bank (2 percent of GDP), African Development Bank (0.8percent of GDP), ECF resources, and official creditors. ### Fiscal consolidation and revenue strategy - Structural measures and tax policy: - Medium-term revenue supported by implementation of the tobacco tax, increasing the rate of the tourism tax, and charging import duty on previously exempt goods. - Implementation of the phased ECOWAS tariff expected to increase revenue by 1 percent of GDP (New SB end-September 2024). - Tax administration and transparency actions: - IMF TA on rationalizing tax expenditures: develop and publish an action plan to reduce tax expenditures, including published estimates of annual tax expenditures in the budget. - Continue focus on collection of VAT, personal and corporate income tax arrears via complete digitalization of revenue administration and collection processes. - Expenditure policy: - Near-term: wages projected to remain broadly stable; spending on social programs and subsidies to increase to shield the vulnerable. - Medium-term: seek efficiency gains while reducing spending on wages and interest payments; gradual decline in current expenditures as a share of GDP. - Public investment program: projected to increase as a share of GDP but capital expenditure will be strictly prioritized. - Review and streamline social welfare programs to ensure adequate coverage. ### Public investment management and cash management reforms - Public investment management reforms (C-PIMA recommendations) to improve project quality: - 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 management improvements: - Treasury Single Account (TSA) in place and use of SIGOF. - Further steps: bring all central government accounts into the TSA; institute a cash coordination committee to systematically review forecasts. - Fiscal coverage and reporting: - Compilation and publication of the historical series of government financial statistics for the general government completed in March 2023 (SB end-March 2023). - Publication of annual budget execution reports for the general government (SB end-September 2023). ### SOE reforms and fiscal risk reduction - SOE monitoring and transparency: - Quarterly analysis of fiscal risk assessments using IMF SOE health check tools (latest covered Q3 2022). - Quarterly monitoring report of SOEs’ budget execution (SBs end-September 2022). - Publish quarterly consolidated transaction and financial flows between government and SOEs (individual and aggregate basis). - Improve annual SOEs’ report to include execution vs initial budget, performance vs medium-term plans, and data on government relations (end-July 2023 SB). - Publish forward-looking targets agreed between Ministry of Finance and the six largest SOEs (New SB end-June 2024). - Specific SOE: Cabo Verde Airlines (TACV): - Reorganization and privatization efforts ongoing; TACV started operations with one aircraft in 2022 with flights to Lisbon. - Government financing to cover projected financing gap during reorganization: €30 million (about 1.6 percent of GDP) over a period of three years. - Plan to design an appropriate business plan covering at least five years to guide restructuring. ### Monetary policy, financial sector resilience, and macro framework - Exchange rate regime and objectives: - Conventional fixed peg exchange regime maintained as anchor for monetary policy. - Monetary policy focus: safeguard the peg and strengthen monetary policy transmission mechanism. - Monetary policy actions: - Resumption of unwinding COVID-19 related support in 2022 due to robust recovery and excess liquidity. - At the Monetary Policy Committee meeting on May 2 (year implied 2023): policy rate raised from 0.25 to 1 to narrow differential with the ECB policy rate and protect reserves. - Central bank stands ready to adjust policy settings further as required. - Reserve and liquidity targets: - Reserves slightly above BCV target range of 5–5½ months of prospective imports (current status). - Over the medium-term: target international reserves in the range of 5½–6 months of prospective imports. - Financial sector soundness: - Banking sector indicators: stable, adequately capitalized and liquid. - Credit growth at end-December 2022: 6.2 percent. - Banking sector prepared to withstand projected increase in non-performing loans at end of the credit moratorium. - Strengthening monetary transmission and capacity: - Develop composite indicators of economic activity and strengthen near-term forecasting (end-June 2023 SB). - Pre-announced schedule for auctions of Monetary Intervention Securities (TIMs) and Monetary Regularization Securities (TRMs). - Develop a framework to guide emergency liquidity assistance. - Seek World Bank TA for a digital economy assessment and national fintech strategy. - NPLs and resolution framework: - Study of loan losses and provisions at expiration of credit moratorium completed (end-December 2022 SB). - Encourage prudent loan restructuring, provide guidance on prudential treatment of moratoria and NPLs, and develop a common framework for bank resolution. - Develop detailed reporting templates for restructured and rescheduled loans and monitor COVID-19 related measures’ impact on asset quality. - Internal analysis of a common framework for resolution of crisis-related NPLs completed (end-December 2022 SB). ### Risks and policy priorities - Downside risks: - Weakened external demand in major tourism markets. - Reversal of downward trend in fuel and food prices increasing number of households requiring safety net support and raising expenditure. - Delays in SOE reforms or reduced fiscal consolidation efforts. - Climate change vulnerability (recent multi-year drought cited) requiring accelerated climate adaptation measures and improved access to water supplies. - High risk of overall debt distress remains a source of vulnerability; concessional financing to limit debt servicing costs under the program is important. - Upside scenario: - Stronger tourism growth could lead to higher overall economic activity. - Policy commitments if outlook deteriorates: - Commitment to take additional measures in consultation with IMF staff. - Climate and financing initiatives: - Government reached agreement in principle with Portugal to explore debt for climate swap initiatives. - Debt management and legal framework: - Update key aspects of debt law, institute the guarantee fund, and enhance debt reporting and analysis. - Training from FAD experts for Ministry of Finance officials planned for the second half of 2023 to support internal DSA and 2024 budget preparation. - Guarantees law provides for establishment of a fund financed by beneficiaries of guarantees. *Source: 1cpvea2023002* ### 23. We plan to further improve AML/CFT effectiveness and technical compliance, in line ### 1cpvea2023002 - 23. We plan to further improve AML/CFT effectiveness and technical compliance, in line ### AML/CFT effectiveness and institutional strengthening - Recent improvements: - Establishment of a national AML/CFT committee. - Exit from the EU Grey List of non-cooperative jurisdictions for tax purposes in 2020. - Approval in 2023 of the National Strategy for 2023-2027 with seven major priority objectives, including the legal framework and proposals for changes, statistics and strengthening of the institutions geared towards a more comprehensive approach. - BCV has embarked on a continuous process (human resources and institutional capacity) on effective risk-based supervision for financial institutions. - Ongoing alignment: - Actions are guided by recommendations in the 2019 GIABA mutual evaluation report. ### Financial sector modernization, supervision, and resilience - Financial Sector Development Plan priorities: - Ongoing modernization of the financial system. - Enhancement of regulatory and supervisory frameworks to deepen the financial sector and support inclusive and sustainable growth while preserving financial stability. - Commitment to a stable and well-capitalized banking system that supports the recovery. - Supervisory practices and stress testing: - Increase frequency of stress testing to at least two times a year from 2023 (SB end-December 2023). - Revamp stress testing methodology to include detailed banking data and cyber security risk assessment. - Legal and institutional reforms: - Legislation amending the BCV Organic Law to strengthen BCV’s decision-making structure, autonomy, accountability and transparency will be submitted to Parliament; this is in line with the IMF safeguards assessment and supported by IMF technical assistance. - Basel II: - Plan to accelerate adoption of Basel II Pillar 1. - During the last part of 2023, an evaluation will be undertaken on the implementation of the Basel principles through the BCP Self-Assessment. ### Monetary and financial statistics improvements - Reconciliation and methodology alignment: - Eliminated discrepancies between BCV disseminated monetary and financial sector survey 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 corrects discrepancies between the other deposit corporations (ODC) survey disseminated by the BCV and data sent to the IMF. - Further enhancements: - Continued improvements planned in the year with enhancement of data on credit by economic activity using INE’s economic activity classification. ### Broad structural reforms to support private sector-led growth - PEDS II priorities (linked to Cabo Verde Ambition 2030): - (i) Progress on 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. - Labor market: - Examination of possible changes to the labor code to increase incentives and make the labor market more dynamic. - Diversification strategy: - Within tourism: move towards more integrated resort projects with top hotel brands. - Promotion of alternative sectors: blue economy, digital economy, industry integrated into regional and global value chains, and modernization of the agriculture sector using desalinated water. - Business environment and land titling: - Legal procedures for businesses to be eased by reducing waiting times and improving links between businesses and judicial processes. - Digitalization of land titling information to reduce delays caused by unclear ownership and incomplete information. ### Social protection, poverty reduction, and inclusion - Social safety nets and targeting: - Strengthen social safety nets through improved targeting of social spending. - Work with World Bank and African Development Bank to better target social programs. - Sign a pact for poverty reduction with the goal of eliminating extreme poverty by 2026. - Protection under the program: - Safeguard spending on social safety nets during the ECF-supported program. - Investments made: social registry and the RSI cash transfer program. - Productive inclusion program to empower the most vulnerable families and provide cash transfers to ensure food security and support education, health, and job market inclusion. ### Climate resilience and related investments - Vulnerability and impacts: - World Bank estimates average economic damage from natural disasters, particularly floods, costs just under 1 percent of GDP per year. - Recent multi-year drought severely weakened agriculture and impaired water supply, affecting the tourism sector. - Climate targets and projects: - Target of 50 percent renewable energy by 2030. - Updated NDC (2021) focusing on adaptation in water, agriculture, oceans, spatial planning, disaster risk reduction, and health. - Infrastructure plans: increase water storage capacity, establish a waste recycling center on Santiago Island, improve agricultural water through efficient irrigation. - Energy sector investments: renewable Brava project and Phase III Expansion of the Port of Palmeira to promote decarbonization in the port sector. - Priority climate-related reforms: - Develop a climate-informed medium-term fiscal and budget framework. - Revise the framework for private and public enterprises participation in climate-smart infrastructure. - Develop an asset register to ensure adequate funding for maintenance of climate-resilient infrastructure. - Financing constraint: - Funding for climate initiatives remains a critical bottleneck; the RSF could eventually provide an opportunity to catalyze financing, including from the private sector. ### Financing, program monitoring, and reporting requirements - Program monitoring schedule: - Third, fourth and fifth program reviews scheduled to be completed by October 2023, March 2024, and October 2024 (based on end-June 2023, end December 2023, and end-June 2024 test dates, respectively). - Thereafter, monitoring on a semi-annual basis by the IMF Executive Board. - Program exchange rates: - 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. - SDRs and other foreign currencies converted into USD at exchange rates reported in Table 1 (Program Exchange Rates). - Quantitative and continuous targets—definitions and reporting: - Central government scope: includes all units of budgetary central government and extrabudgetary entities; excludes local government (municipalities), social security funds and public corporations. - Central government primary balance: total tax and non-tax revenues and grants minus primary expenditure; measured as cumulative flow over the calendar year. - Revenues recorded when funds are transferred to a government revenue account; tax revenues recorded net of tax refunds. - Primary expenditure recorded on a cash basis and covers recurrent expenditures and capital expenditure. - Floor on the primary balance adjusted upward (downward) by the surplus (shortfall) in disbursements of grants to the baseline projection. - Tax revenue floor: - Tax revenues exclude asset sales, grants, and non-tax revenues; target is cumulative flow from the beginning of the calendar year. - Net Other Liabilities floor: - Defined as the sum of central government deposits, loans to SOEs and municipalities (onlending), capitalization, and other assets; measured cumulatively over the calendar year. - Deposits include claims on deposit-taking corporations (including the central bank). - Net onlending is disbursements minus repayments by SOEs. - Capitalization defined as capital injection or equity participation by the central government. - Ceiling on Net Domestic Financing (NDF): - NDF defined as sum of (i) the net position of the government vis-à-vis the central bank and commercial banks and (ii) financing through issuance (net of redemptions) of securities to nonbank residents. - NDF at end-June 2023, end-December 2023, and end-June 2024 (PCs) must be equal to or less than amounts in Table 1 (QPCs) attached to the MEFP. - NDF ceiling adjusted downward (upward) if net external budgetary assistance exceeds (falls short of) program projections in Table 3 of external budget assistance. - External budgetary assistance defined to include budget loans, grants and non-earmarked debt relief operations (excluding project-related loans and HIPC/MDRI debt relief), and budget support loans from IMF, World Bank, AfDB, European Union and others. - Non-accumulation of domestic payments arrears: - Government will not accumulate any new domestic payments arrears. - An obligation is in arrears if unpaid within the normal grace period of 60 days (30 days for government salaries and debt service) or other period specified by budget law or contract, after verified delivery of goods and services, unless under good faith negotiations. - DNP of the Ministry of Finance to submit quarterly detailed table of stock of domestic payments arrears within six weeks after the end of the quarter. - Ceiling on PV of new external concessional debt: - Ceiling applies to the PV of new external debt contracted or guaranteed by the public sector with original maturities of one year or more, including guaranteed private debt. - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies if deviations are prompted by changes in financing terms; adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed. - Debt definition: - Debt defined per Point 8(a) of the Guidelines on Public Debt Conditionality (Executive Board Decision No. 16919-(20/103), October 28, 2020): current contractual liabilities requiring future payments in assets or services; forms include (i) loans (including repurchase agreements and official swap arrangements), (ii) suppliers’ credits, and (iii) leases (PV at inception of lease payments excluding operation/maintenance). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligations that constitute debt are debt. *Source: Cabo Verde — MEFP and Technical Memorandum of Understanding (excerpt).* ### 19. Under the program, ceilings on medium and long-term, as well as on short-term, ### 19. Under the program, ceilings on medium and long-term, as well as on short-term, ### Concessional external debt: definition, limits, and calculation - Ceilings on medium- and long-term, as well as on short-term, concessional external debt constitute quantitative targets under the program. - Coverage includes budget loans, projects and program loans, and on-lending loans to SOEs in line with the fiscal program. - For program purposes, a debt is concessional if it includes a grant element of at least 35 percent. - The grant element is defined as the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value. - The PV of debt at contracting is calculated by discounting the future stream of payments of debt service due on the 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 concessional external debt. - New concessional external debt excludes normal short-term (less than one year) import-related financing. ### Variable-rate debt: reference rate and spreads used for PV calculations - For debts carrying a variable interest rate in the form of a benchmark 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. - Spreads relative to six-month USD LIBOR: - 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 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 other than six-month USD LIBOR, a spread reflecting the difference (rounded to the nearest 50 bps) will be added. - Given the anticipated global transition away from LIBOR, the TMU can be updated to reflect benchmark replacements (U.S. SOFR; U.K. SONIA; EURIBOR; and TONAR) prior to complete phase out, once operationally feasible. ### Reporting requirements for external debt - The government will consult Fund staff before assuming 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 quarterly within six weeks of the end of each quarter. ### Non-concessional external debt: zero ceiling and definitions - Ceilings on medium- and long-term, as well as on short-term, non-concessional external debt constitute quantitative targets. - A zero ceiling on non-concessional external debt is on a continuous basis. - For program purposes, a debt is non-concessional if it includes a grant element of less than 35 percent. - The grant element and PV calculation follow the same methodology as for concessional debt (discount rate 5 percent). - Debt rescheduling and debt reorganization are excluded from the limits on non-concessional external debt. - The quantitative target applies to 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. - Reporting: same quarterly reporting within six weeks of the end of each quarter; consult Fund staff before assuming uncertain liabilities. ### Gross International Reserves (GIR) of the Central Bank (BCV) - A floor on the stock of GIR of the BCV constitutes a quantitative target. - GIR are defined as gross international reserves of the BCV that are readily available (liquid, marketable, free of pledges), controlled by the BCV, and held for balance of payments needs and FX market intervention. - GIR include gold, SDRs, IMF reserve position, foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. - 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 (valued at current exchange rates for adjuster calculations). - Reporting: 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 - The government will not accumulate any new external payments arrears; this is a continuous target. - Monitoring via monthly execution of the cash-flow plan and release of budget appropriations. - External payments arrears are defined as 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 for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded. - Reporting: (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted quarterly 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 - 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 wages and salaries. - For monitoring, data will be measured cumulatively over the fiscal year and reported quarterly by the DNP with a lag of no more than six weeks from end-of-period. ### Other data requirements and reform targets - Exports and imports data (volume and prices) compiled by the Director of Customs and the BCV will be transmitted quarterly within five weeks after quarter end. - A preliminary quarterly balance of payments by the BCV will be forwarded within six weeks after the end of each quarter. - Statement of Other Economic Flows (GFSM2001 or GFSM2014) relative to holding gains/losses of the previous year with ASA, Electra, EMPROFAC, ENAPOR, and IFH: annual, within three months after the end of the following year (15 months after the closing date). - Consolidated balance sheet of ASA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year: annual, 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 achieved when pre-announcements are posted on the central bank website. - Introduce a composite indicator of economic activity: assessed achieved when the central bank releases the composite indicator. - Carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium: assessed achieved when study is completed and released. - Develop a common framework for resolution of crisis-related NPLs (jointly by BCV and World Bank): assessed achieved when complete and released. - Construct a Compliance Risk Management (CRM) system for tax revenue collection optimization: assessed achieved when MOF provides staff with a copy of methodology. - Increase frequency of stress testing to twice per year: assessed achieved when central bank provides findings of the second annual stress test. - Develop and publish an action plan to reduce tax expenditures: assessed achieved when MOF provides staff a copy of the approved action plan. - Implement the action plan on tax expenditures in the 2025 budget: assessed achieved when MOF provides staff a copy of the approved 2025 budget with specification of actions and impacts. - Publish in the SOE report measurable metrics between the MOF and the 6 largest SOEs on financial performance: assessed achieved when the report is published on the MOF webpage. ### Debt Sustainability Analysis (DSA): key findings and public debt coverage - Risk assessments: - Risk of external debt distress: Moderate. - Overall risk of debt distress: High. - Granularity in the risk rating: Limited space to absorb shocks. - Application of judgement: No. - The PV of public and publicly guaranteed (PPG) external debt-to-GDP ratio is below the threshold over the forecast period and breaches the threshold protractedly under the export stress test. - The lower PV of debt path compared to the last DSA reflects mainly the faster than anticipated rebound in growth in 2022. - Liquidity indicators (debt service to revenue and to export ratios) remain firmly below their respective thresholds under the baseline, reflecting the highly concessional nature of Cabo Verde’s external debt. - The PV of total public debt-to-GDP ratio is projected to breach the threshold during 2023–2027 under the baseline scenario, an improvement on the previous DSA when the breach was of longer duration, but protractedly breaches the threshold under two stress tests. - Debt sustainability is predicated on assumptions including growth converging to and remaining near potential, sustained fiscal consolidation in line with the ECF program, acceleration of structural reforms (particularly SOE restructuring), prudent borrowing policies sourcing mainly concessional external loans, strengthened debt management, and measures to enhance government securities market functioning. - Continuous progress in export and output diversification is needed given vulnerability to exogenous shocks. - Debt-carrying capacity: assessed as “strong” with a composite index score of 3.22 (based on October 2022 WEO and 2021 CPIA). - Public debt coverage in the DSA: - Comprises debt owed by the central government and certain government guarantees. - Social security funds and local governments are excluded; coverage of EBFs focused on government support to SOEs through on-lending and capitalization. - Government guarantees to SOEs’ external borrowing are included in the baseline stock; publicly guaranteed domestic debt and non-guaranteed SOE debt are not included. - Efforts to broaden coverage ongoing, including a World Bank project focused on SOEs. - Contingent liability stress test adjustments: - Default shock of 0 percent of GDP retained for general government components not captured in baseline. - Default shock for SOEs’ debt raised from 2 percent of GDP to 23.4 percent of GDP to reflect vulnerabilities associated with publicly guaranteed domestic borrowing by ELECTRA, TACV, IFH, ENAPOR, NEWCO, CERMI amounting to CVE 15.6 billion at end-2022 (6.4 percent of GDP); and non-guaranteed domestic debt of SOEs of about CVE 41 billion (about 16.7 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 a mainly foreign-owned, well-capitalized banking sector. ### Background: evolution and composition of public debt (selected statistics) - Pre-pandemic growth and debt: - Between 2016 and 2019, growth averaged 5 percent per year. - Public debt decreased from a peak of 115.6 percent of GDP in 2014 to 109.3 percent in 2019. - COVID-19 impact: - Total public sector debt reached 144.6 percent of GDP at end-2021 (up from 109.3 percent in 2019). - The increase reflected a large output contraction of 19.3 percent and a higher public sector overall deficit of 9.0 percent of GDP in 2020, financed mainly with increased external concessional borrowing. - 2022 rebound: - Economy grew by 17.7 percent in 2022. - Debt-to-GDP ratio reduced to 121.2 percent of GDP at end-2022. - External debt characteristics: - Multilateral institutions (IMF, World Bank, African Development Bank) account for about 30.6 percent of external public debt. - Bilateral creditors account about 19.8 percent of external public debt; Portugal is the largest bilateral creditor. - Debt service cost: average interest rate about 0.93 percent; average maturity about 17.2 years. - Exchange rate risk is low due to the exchange rate peg; external assessment suggests undervaluation of the exchange rate and international reserves are at a comfortable level. - Commercial debt: - Mainly owed to Caixa Geral de Depósitos (CGD): CGD accounts for 82.8 percent of total commercial loans. - CGD loans provided under favorable terms with average maturity of 11.4 years and average interest rate of 1.6 percent. - Domestic debt and market structure: - At end-2022, domestic debt accounted for 30.6 percent of total public debt (a slight increase from 29 percent at end-2021). - Domestic debt mostly held by the banking sector in medium- and long-term Treasury securities. - Treasury bonds accounted for 96.2 percent of domestic debt, with an average maturity of about 7 years and average interest rate of 3.8 percent. - Commercial banks hold 64.2 percent of domestic government securities; non-banks hold 35.8 percent, of which the national social security fund accounts for 34.8 percent. *Prepared by the Staff of the International Monetary Fund and the International Development Association; June 7, 2023.* ### 9. Debt service on external public debt is moderate. The ratio of public external debt ### 1cpvea2023002 - 9. Debt service on external public debt is moderate. The ratio of public external debt ### Debt service and external public debt findings - The ratio of public external debt service to exports: - 20.2 percent in 2021 - 12.4 percent in 2022 - Is estimated to decline steadily from 2024 onwards. - The ratio of public external debt service to revenue: - Decreased to about 8 percent in 2021 from 13.4 percent in 2020 - Projected to increase to about 18 percent of GDP by 2024 and average about 16 percent over the medium term, declining thereafter. - Total public debt service: - Absorbed about 30 percent of revenue and grants in 2022 - Projected to reach 38 percent in 2024 and steadily decline thereafter. - Under the baseline scenario, the PV of PPG external debt-to-GDP ratio remains below its threshold throughout the projection period. - Risk of external debt is assessed as moderate; however, stress tests (especially export shocks) can breach thresholds (see Stress tests section). ### Publicly guaranteed and private external debt - Publicly guaranteed debt: - CVE 21.0 billion at end-2022 - Equivalent to 8.6 percent of GDP at end-2022 - State guarantees are mainly issued for SOEs’ domestic debt. - Main recipients of guarantees in 2022 included: TACV, ELECTRA, NEWCO, Prog. Start-up/Ecosistema, Aguas de Santiago, ICV, AEB, and liabilities to the domestic banking system. - Historical private external debt: - Stock about 14.5 percent of GDP at end-2022 - Private debt includes both bank and non-bank external debt. - Data gap: lack of data on the debt service on guaranteed domestic debt of SOEs prevents inclusion of domestic SOE guarantees in the DSA baseline. ### Macroeconomic outlook and key assumptions - Revisions and recent history: - National accounts rebased from 2007 to 2015; updated accounts published in March 2023. - Published nominal GDP in 2022 was 14.1 percent higher compared to the last DSA. - Real GDP growth: contracted 19.3 percent in 2020; 6.8 percent in 2021; 17.7 percent in 2022. - Growth projections: - Growth projected at 4.4 percent in 2023 - Increasing marginally to 4.7 percent over the medium term - Converging to potential growth of 4.5 percent - Long term historical average growth rate (1980-2022) was 4.9 percent. - Inflation and prices: - Inflation increased to 7.9 percent in 2022 - GDP deflator increased to 6.4 percent in 2022 - Inflation and GDP deflator projected to ease to 5.2 percent and 4.5 percent, respectively, in 2023 and 2 percent by 2024. - Tourism and external sector: - Tourism services assumed to continue growing due to increased hotel capacity, diversification of markets, and steady FDI inflows. - Current account baseline: - 5.6 percent deficit in 2023 - 4.6 percent deficit in 2024 - Projected to remain above 4 percent of GDP from 2024–26 - Projected to decline to about 3.7 percent of GDP in 2027 - International reserves expected to be sustained at about 6 months of prospective imports. ### Fiscal and financing assumptions - Fiscal balance and consolidation: - Overall fiscal deficit improved from 7.1 percent of GDP in 2021 to 4.1 percent of GDP in 2022. - Projected to reach 0.6 percent of GDP in 2027 (i.e., improve from -4.1 percent in 2022 to -0.6 percent by 2027). - Projected primary balance adjustment path of about 2.5 percent of GDP over 2023–25. - Authorities plan revenue measures including: invoicing electronically at least 50 percent of taxpayers for VAT, increase in tobacco tax, concession of the airport management company, and review of tax expenditures that would net up to1 percent of GDP in 2025. - Projected reduction in government financial support to SOEs expected to bring total financing need to about 0.6 percent of GDP by 2027. - Financing mix and assumptions: - Share of domestic debt assumed broadly stable at about 30 percent. - Financing for the 2023 budget mostly concessional and semi-concessional loans; multilateral and bilateral budget support of US$77.4 million expected in 2023 (about 2.7 percent of GDP). - DSA assumes gradual move toward lower concessional resources in the long term, with some semi-concessional and limited non-concessional borrowing. - Domestic debt profile assumes bonds issuance with maturities of at least 4 years. - Average interest rates assumed: 1 percent for T-bills, 4 percent for short-term bonds, 5 percent for medium to longer-term bonds. - Authorities drew down US$32 million (1.5 percent of GDP) of recent SDR allocations to finance the 2022 and 2023 budget. ### Realism tools, drivers of debt dynamics, and investment - Realism assessment: - Fiscal adjustment path is ambitious but judged achievable by staff given measures to strengthen domestic revenue mobilization and expenditure restraint. - The primary balance adjustment of about 2.5 percent of GDP over 2023–25 is in the top quartile of historical distribution for LICs. - No other signs of over-optimism flagged by realism tools in terms of large changes to investment or contributions to growth. - Drivers of debt dynamics: - Interest rates expected to contribute positively to PPG external debt accumulation, but less than historical experience. - Price and exchange rate changes projected to exert downward pressure on debt accumulation more than historically. - For total public debt, projected contribution of real GDP growth to debt reduction is higher than historical five-year change. - Unexpected changes in the primary deficit, current account/prices, and exchange rates were main past drivers of forecast errors. - Public investment: - Contribution of public investment to real GDP growth remains marginal; public investment expected to average about 4.5 percent of GDP in the medium term (lower than previous DSA). - Private investment expected to average about 30 percent of GDP over 2023-27. ### Country classification, stress tests, and scenario outcomes - Debt-carrying capacity: - Assessed as “strong” (CI score stands at 3.22, above threshold of 3.05) using October 2022 WEO vintage and 2021 CPIA. - CI score contributions: CPIA (46 percent), international reserves (31 percent), world growth (12 percent), remittances (6 percent), country real growth rate (4 percent). - Stress testing framework: - DSA relies on six standardized stress tests and a contingent liability stress test; tailored contingent liabilities test customized due to incomplete public sector debt coverage. - None of the tailored stress tests is triggered for Cabo Verde. - External public debt under stress: - PV of PPG external debt-to-GDP breaches threshold under stress tests. - Under most extreme export shock: rises to about 70.4 percent in 2025 before gradually decreasing to threshold of 55 percent up to 2033. - PV of PPG external debt-to-exports ratio and debt service-to-exports ratio exceed respective thresholds from 2023–33 under the export stress test. - Projected trajectories vulnerable to growth shocks and to a one-time depreciation shock. - Total public debt under baseline and stress: - PV of total public debt-to-GDP ratio exceeds the 70 percent benchmark through 2027 under the baseline, producing a mechanical high-risk signal. - Benchmark is breached under each of the six standardized bound tests and the tailored combined contingent liabilities test; growth shock is most severe (threshold breached throughout projection period). - Risk ratings: - DSA classification: “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 threshold through 2027). - Debt service projected to average about 38 percent of revenues over the next five years. ### Policy recommendations and vulnerabilities - Policy priorities and recommendations: - Emphasize macroeconomic stability, particularly fiscal discipline. - Prioritize mobilizing additional revenues and continue the strategy of incurring only concessional borrowing. - Implement growth-enhancing structural reforms, including: - Completing SOE reforms (including privatization) - Reducing fiscal risk from SOEs - Promoting economic diversification (blue economy) - Reducing informality - Facilitating access to finance for small and medium-sized enterprises - Develop the government securities market and lower costs of domestic borrowing. - Risks and vulnerabilities highlighted: - Limited space to absorb shocks; high concentration of economic and export activity in tourism increases vulnerability. - Outlook dependent on broadly stable global environment supporting tourism; higher fuel and commodity prices or weaker demand in key markets could reduce growth. - Contingent liabilities associated with SOEs’ debt pose notable vulnerabilities. - Support from Portugal, the main bilateral creditor, partly mitigates risk. *CABO VERDE, INTERNATIONAL MONETARY FUND* ### 29. The authorities agreed with the results of the DSA and welcomed the growth driven ### 1cpvea2023002 - 29. The authorities agreed with the results of the DSA and welcomed the growth driven ### Authorities' assessment of debt and fiscal outlook - Authorities agreed with the results of the DSA and welcomed the growth-driven improvement in the debt outlook. - They reaffirmed commitment to fiscal consolidation to preserve debt sustainability and reduce the risk of overall debt distress. - They noted strong performance under the new Extended Credit Facility and continued support from other development partners, notably the World Bank, as placing them on the path to achieve their economic objectives. - They reaffirmed commitment to prudent borrowing policies and to improving the functioning of the government securities market to enhance debt sustainability over the long term. - Authorities observed uncertainty regarding macroeconomic assumptions due to: - increasing risk of global financial fragmentation and spillovers from monetary tightening cycle in advanced economies; - lingering inflationary impact of the war in Ukraine. ### Recent macroeconomic developments and vulnerabilities - The economy rebounded well from the severe recession induced by the COVID-19 pandemic that severely disrupted planned fiscal consolidation. - The pandemic exposed structural challenges including heavy dependence on tourism and vulnerability to exogenous shocks. - The impact of high prices due to the war in Ukraine magnified vulnerabilities, particularly for the vulnerable. - Authorities highlighted increased revenue buoyancy due to the robust recovery as an opportunity to build fiscal space while maintaining support for the most vulnerable. - They highlighted steps taken to mitigate the impact of food and fuel price increases triggered by the war in Ukraine, while observing fiscal targets under the ECF program. ### Debt sustainability analysis context and material included - The section references multiple analytical exhibits covering 2023–33 and 2022–43 timeframes: - Figure 1. Cabo Verde: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2023‒33 - Figure 2. Cabo Verde: Indicators of Public Debt Under Alternative Scenarios, 2023–33 - Figure 3. Cabo Verde: Drivers of Debt Dynamics - Baseline Scenario - Figure 4. Cabo Verde: Realism Tools - Figure 5. Cabo Verde: Qualification of the Moderate Category, 2023–33 - Table 2. Cabo Verde: External Debt Sustainability Framework, Baseline Scenario, 2022–43 (Percent of GDP, unless otherwise indicated) - Table 3. Cabo Verde: Public Sector Debt Sustainability Framework, Baseline Scenario, 2022–43 (Percent of GDP, unless otherwise indicated) - Table 4. Cabo Verde: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt 2023–33 (Percent) - Table 5. Cabo Verde: Sensitivity Analysis for Key Indicators of Public Debt, 2023-33 (Percent) ### Fund relations, program details, and key financial figures (as presented) - Membership Status: Joined: November 20, 1978; Article VIII - Quota and related items (as shown): - Quota 23.70100.00 - IMF's Holdings of Currency (Holdings Rate) 20.1685.05 - Reserve Tranche Position 3.5715.05 - SDR Department: - Net cumulative allocation 31.88100.00 - Holdings 0.461.44 - Outstanding Purchases and Loans: - RCF Loans 23.70100.00 - ECF Arrangements 22.5295.02 - Latest Financial Commitments — Arrangements (dates and amounts shown): - ECF Jun 15, 2022 Jun 14, 2025 45.03 22.52 - ECF Apr 10, 2002 Jul 31, 2005 8.64 8.64 - Stand-By Feb 20, 1998 Mar 15, 2000 2.50 0.00 - Outright Loans: - RCF Apr 22, 2020 Apr 24, 2020 23.70 23.70 - Overdue Obligations and Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming principal and charges/interest and totals shown in tabular form with years 2023–2027; entries include figures presented as: - Principal: 2.374.74 5.87 - Charges/Interest: 0.861.18 1.181.18 1.18 - Total: 0.861.18 3.555.92 7.04 ### Exchange rate arrangement and central bank safeguards - Exchange Rate Arrangements: - The de jure and de facto exchange rate arrangements of Cabo Verde are a conventional peg. - The escudo has been pegged to the euro at a rate of CVE 110.265 per euro since January 4, 1999. - Cabo Verde accepted the obligations of Article VIII, Sections 2, 3 and 4 of the Articles of Agreement effective July 1, 2004. - Safeguards Assessment (Banco de Cabo Verde, July 2022): - Found relatively strong external audit arrangements and enhanced financial reporting since 2008. - Governance weakness: continued lack of an independent oversight body affecting effectiveness of internal audit and operationalizing risk management. - Recommended legal amendments to establish a decision-making structure separate from executive management by introducing a majority non-executive (independent) board, strengthen BCV’s personal and financial autonomy, and enhance accountability and transparency. - BCV submitted draft amendments to the central bank law to the Ministry of Finance in December 2022 and strengthened the internal audit function, including through a revised internal audit charter and targeted capacity building plan. ### Statistical improvements, gaps, and technical assistance needs - National Accounts: - Significant improvements with TA from IMF AFRITAC West 2; timely release of quarterly and yearly GDP data. - Most recent annual GDP data released: 2022. - Most recent quarterly NA: Q4-2022 (released in March 2023). - Rebased annual GDP estimates (base year 2015), series 2015-2016, published in February 2022. - Backcasted GDP estimates (base year 2015), series 2007-2014, published in March 2022. - Quarterly GDP (QGDP) new series Q1/2007-Q4/2022 published in March 2023; base year 2015; aligned with AGDP and based on IMF Quarterly National Accounts Manual 2017. - Full implementation of 2008 SNA and QNA requires substantial improvement in source data collection; capacity constrained. - Recommendations: prioritize data collection, improve use of administrative data, and seek further TA for preliminary estimation/extrapolation of economic activity from sampling surveys. - Price Statistics: - Revamped CPI with new methodology launched in February 2008. - Revised CPI with new weights and updated commodity basket published in February 2019. - CPI published monthly and in a timely manner. - INECV developing a Producer Price Index to be released in the near future. - Government Finance Statistics: - Improvements with TA; compilation in line with GFSM 2014; extended coverage beyond Budgetary Central Government to include Social Security Funds and Local Governments. - Challenges remain obtaining source data for LGs and Extra Budgetary Units (EBUs); need to improve GFS dissemination and include EBUs, SOEs and LGs. - Monetary and Financial Statistics: - MFS adequate and quality improved. STA mission April-May 2023 assisted BCV in improving MFS quality, coverage, flow data, and presentation per MFSMCG 2016 recommendations. - BCV produces SRFs and publishes SRF-based monetary data monthly in IFS. - Integrated monetary database meeting STA and AFR needs is in place. - BCV reports some Financial Access Survey (FAS) indicators including mobile and internet banking and gender-disaggregated data. - External statistics: - BCV reports quarterly balance of payments and international investment position data to STA following BPM6. - Improvements from use of financial sector source data and Ministry of Finance stock data to compile government external debt stocks. - Further improvements needed in coverage for foreign trade in goods and the nonbank private sector, including direct investment; offshore banks data are not covered. - Recommendation: set a roadmap for including offshore banks in external sector statistics in coordination with other statistical domains and IMF consultation. - Data Standards and Quality: - Cabo Verde participates in e-GDDS since 2004 and established a National Summary Data Page in January 2020; metadata last updated mostly in 2003-2004. ### IMF–World Bank collaboration highlights - Ongoing exchange of views on macroeconomic and structural issues; close cooperation on debt management, public financial management, SOE performance, and investment planning. - World Bank Country Economic Memorandum completed March 2023. - Table of joint work program activities and mission timing as of April 30, 2023 (mutual information, fund and bank work programs, and requests for inputs) referenced for fiscal years 2023/2024. *Source: Staff Report for the 2023 Article IV Consultation, Second Review under the Extended Credit Facility Arrangement, and Request for Modification of a Performance Criterion—Informational Annex (June 7, 2023).* ### 17.7 percent in 2022 (compared with a program projection of 10.5 percent). Tourist arrivals ### 1cpvea2023002 - 17.7 percent in 2022 (compared with a program projection of 10.5 percent). Tourist arrivals ### Economic outlook and inflation - Tourist arrivals now exceed pre-pandemic levels and the strong performance of this key sector is positively impacting the economy more broadly. - 2022 average inflation reached 7.9 percent—the highest level of the last 20 years—driven by higher food, energy, and transportation costs. - Inflation moderated somewhat, reaching 5.6 percent in March (year-on-year). - Growth projections: - Real GDP growth in 2023 is projected at 4.4 percent (under the assumption that tourist arrivals and receipts will begin to normalize). - Inflation is expected to moderate to 5.2 percent in 2023, declining thereafter to 2.0 percent (consistently with the peg to the euro and the projected evolution of inflation in the euro area). - Downside risks: - Weakened incomes in Cabo Verde’s major tourism markets, particularly Europe. - Climate change, evidenced by recurring and prolonged droughts. ### Program performance - Program performance has been strong, supported by: - A stronger-than-expected rebound in tourism that led to spectacular, double-digit growth in 2022. - Continued fiscal prudence, cautious debt management, and strict implementation of the program’s reform agenda. - Conditionality and benchmarks: - Authorities met all end-December 2022 QPCs, as well as all end-September and end-December 2022 ITs, except the floor on social spending which was missed by a very small margin. - All end-December 2022 and end-March 2023 structural benchmarks were met. - A modification to the end-December 2023 QPC on the PV of new external debt is being requested to reflect data clarifications on new borrowing. - Financing and policy support: - The disbursement associated with the completion of this review will support continuity of the government’s policies and reform agenda under the 2022-2026 Sustainable Development Strategic Plan II (PEDS II). ### Fiscal performance and debt dynamics - Fiscal results: - The primary fiscal deficit was reduced to 1.9 percent of GDP in 2022, from 5.2 percent of GDP in 2021. - Revenue gains reflect faster growth and implementation of tax policy and revenue administration measures, including the 5 percent import duty on previously exempted imports and the ongoing implementation of the electronic invoicing system. - The 2023 budget is being executed in line with the fiscal strategy; preliminary data point to strong revenue performance in the first quarter of the year. - Authorities continue seeking efficiency gains, resulting in a gradual decline in current expenditures as a share of GDP. - Execution of part of budgeted spending on goods and services and investments will be pending on the receipt of proceeds from airport concession fees and overall revenue performance. - Debt indicators and management: - The debt-to-GDP ratio declined from 144.6 percent in 2021 to 121.2 percent in 2022 and is expected to reach 112.6 percent in 2023. - This decline reflects higher growth and lower primary fiscal deficits, and benefits from the authorities’ prudent debt management strategy. - Ongoing discussions with bilateral creditors focus on innovative approaches, such as the conversion of the debt into investment. - Authorities are trying to maximize IFI concessional funding for well-identified public investment projects to limit recourse to more costly domestic financing. - IMF technical assistance is expected to continue helping the authorities on debt legislation updates and debt reporting and analysis enhancements. ### Monetary and financial policies - Central Bank actions and reserves: - The Central Bank of Cabo Verde (BCV) remains focused on protecting the peg and ensuring financial sector stability. - The BCV’s Monetary Policy Committee raised the policy rate by 75 bps last month. - International reserves at the BCV stood at 5.9 months of imports at end-2022. - The BCV will continue to monitor international markets and actions of major monetary authorities, in particular the ECB, and risks arising from the local economy. - Financial sector resilience: - Cabo Verde’s financial sector remains stable, adequately capitalized, and liquid. - The banking sector is well positioned to withstand the potential impact of the end of the COVID-related credit moratorium. - The BCV has put in place a toolkit mechanism to help banks with the rescheduling of loans to viable firms, if needed, and NPL resolution. - Continued implementation of strengthened regulation and supervision should support NPL monitoring procedures. - The ongoing risk-based supervision process for financial institutions will contribute to improving financial system resilience. - Fintech, legislation, and capacity building: - Authorities intend to develop a national fintech strategy, with support from the World Bank, to establish pillars for financial technologies that embrace innovation and competition, and lower financial transaction costs. - IMF technical assistance has been provided on amending the BCV Organic Law to enhance central bank independence, accountability, and transparency in line with IMF safeguards assessment recommendations. - Draft legislation is expected to be sent to the National Assembly this year for discussion and approval. - The BCV is preparing a three-year comprehensive capacity development plan with MCM support to strengthen: - macroprudential and financial crisis management; - financial supervision and regulation; - emergency liquidity assistance; - payments infrastructure; - financial inclusion, digital finance, and cybersecurity. ### Structural reforms and PEDS II priorities - PEDS II objectives: - PEDS II sets an ambitious agenda for development and is an instrument for dialogue between the Government and the private sector to enhance the business environment and regulatory framework. - PEDS II promotes privatization and the improvement of SOE efficiency, reduction of informality, and facilitation of access to finance, particularly for SMEs. - Economic diversification and strategic sectors: - Promotion of alternative sectors, such as the blue economy, digital economy, industry integration into regional and global value chains, and modernization of agriculture. - Exploring the nexus between new sources of energy and water is an important component of the reform agenda. - Governance and AML/CFT: - One PEDS II pillar includes measures to further strengthen the country’s AML/CFT framework, with a view to eventually adding Cabo Verde to the list of countries with the lowest perceived levels of corruption and most advanced in terms of the quality and transparency in public spending. ### Climate resilience and financing - Climate vulnerabilities and commitments: - Building a climate resilient economy is key to sustainable development; authorities are firmly committed to addressing vulnerabilities, including climate challenges. - Ensuring adequate funding for climate mitigation and adaptation strategies and the maintenance of assets to safeguard climate-resilient infrastructure is critical. - Authorities are fully committed to the implementation in recently completed C-PIMA assessment. - Resilience and sustainability facility (RSF): - Authorities are extremely interested in discussions with staff on an RSF arrangement, which hopefully could be completed in the second half of the year. - The RSF will be critical in helping implement the Government’s climate resilience and carbon-neutral development plans—described succinctly in Annex IX of the staff report—and catalyze green financing from other IFIs and the private sector. ### Final remarks and request to Executive Directors - Authorities have demonstrated strong commitment to the ECF-supported program, evidenced by strong program performance to date. - Fund support through financing, policy advice, and capacity development has been paramount in helping Cabo Verde during the ongoing recovery from multiple shocks. - The program supports the authorities’ fiscal consolidation and debt management plans, and the implementation of an ambitious structural reform agenda under PEDS II. - Request: Executive Directors are asked to favorably consider the completion of the second review under the ECF arrangement and the conclusion of the 2023 Article IV consultation. *Source: IMF staff report content provided in the input.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1cpvea2023002.pdf_