## CABO VERDE: THIRD REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA, AND REQUEST FOR AN ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY

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### Context and outlook
- Post-Covid rebound: Real GDP growth of 6.4 percent in 2021 and 17 percent in 2022; H1-2023 growth 5.8 percent y/y; projected 2023: 4.5 percent.
- Climate finance need: NDC estimates USD 2 billion between now and 2030, equivalent to about 6.1 percent of GDP per year.
- RSF request: SDR 23.69 million (100 percent of quota, approximately US$31.45 million).
- Objective of RSF support: address climate vulnerabilities and catalyze concessional and private finance for climate adaptation and transition.

### Program performance and approvals
- Executive Board actions:
  - Completed the Third Review of the 36-month ECF arrangement (approved June 15, 2022).
  - Approved an 18-month arrangement under the RSF.
- Access and disbursements:
  - Completion of third review allows draw of SDR 4.5 million (about US$6 million).
  - ECF disbursements of SDR 15.76 million (66.5 percent of quota, about US$21.19 million) boosted reserves.
- Program conditionality and outcomes:
  - All quantitative performance criteria (QPCs) for end-June 2023 were met.
  - Indicative targets (ITs) for end-March and end-June 2023 were met.
  - Structural benchmarks (SBs) for end-June, end-July, and end-September 2023 were met.
  - ECF expires in June 2025; new set of end-December 2024 PCs and end-September 2024 ITs proposed.
  - Staff supported technical modifications to PCs and TMU definitions to reflect World Bank disbursement schedule and privatization delays.

### RSF objectives, reform areas, and key measures
- Five RSF reform pillars:
  - (i) strengthening climate change policy governance;
  - (ii) improving physical and fiscal resilience;
  - (iii) strengthening mitigation and resilience through energy efficiency and transition to renewables;
  - (iv) promoting adaptation by ensuring ecological and economic sustainability of water resources and planning for long-run climate impacts;
  - (v) strengthening financial sector resilience to climate change.
- Selected RSF measures and outcomes:
  - RM1: Establish council/body for coordinating climate change policy planning and DRM (Timing: End-April 2024; 4th ECF Review).
  - RM2: Ministry of Finance to conduct and publish quantitative analysis of fiscal risks generated by climate change (Timing: End-September 2024; 5th ECF Review).
  - RM3: Amend PPP legal framework and publish manual integrating climate requirements (Timing: End-April 2024; 4th ECF Review).
  - RM5/RM6: Determine cost-recovery rates and adopt tariff/regulatory frameworks for electricity and water to achieve financial sustainability (Timing: End-April 2025; 6th ECF Review).
  - RM7: Expand Unique Social Registry (USR) to 100 percent coverage of poor and vulnerable households (Timing: End-Nov. 2024; 5th ECF Review).
  - RM9: BCV to develop climate information architecture for banks and publish disclosure guidelines (Timing: End-Nov. 2024; 6th ECF Review).

### Recent macroeconomic developments (selected quantitative findings)
- Real GDP growth (selected): 2021: 6.4 percent; 2022: 17 percent; H1-2023: 5.8 percent y/y; Projected 2023: 4.5 percent.
- Inflation: December 2022: 7.6 percent (end of period); End-August 2023: 2.9 percent y/y; Projected end-2023: 3 percent.
- External reserves and BoP:
  - Gross international reserves grew to around €639 million at end-September 2023.
  - Gross international reserves (months of prospective imports): 2023 = 5.7 months; projected 2024 = 6.1 months.
- Fiscal H1-2023 performance:
  - Tax revenues increased 22.6 percent (1H2023/1H2022).
  - Primary balance over 1H2023 registered a surplus of CVE 2,759 million compared with the CVE -4,141 million program target.

### Projections and key statistics (table values preserved)
- Real GDP projections: 2023 Proj. 4.5; 2024 Proj. 4.7; 2025 Proj. 4.7; 2026 Proj. 4.6; 2027 Proj. 4.6; 2028 Proj. 4.5.
- Consumer price index (end of period): 2023 3.0; 2024 2.0; 2025 2.0; 2026 2.0; 2027 2.0; 2028 2.0.
- Exports of goods and services (annual percent change): 2023 3.2; 2024 8.7; 2025 9.5; 2026 9.4; 2027 8.7; 2028 8.1.
- Imports of goods and services (annual percent change): 2023 10.2; 2024 9.8; 2025 7.0; 2026 5.4; 2027 6.0; 2028 4.9.
- Current account (including official transfers) as percent of GDP: 2023 -5.9; 2024 -6.1; 2025 -6.3; 2026 -5.8; 2027 -5.4; 2028 -4.6.
- Total nominal government debt (percent of GDP): 2022 121.2; 2023 127.1; 2024 112.6; 2025 119.9; 2026 116.2; 2027 111.2; 2028 105.4.
- Present value of PPG external debt (percent of GDP): 2023 53.5; 2024 50.9; 2025 54.2; 2026 53.3; 2027 52.0; 2028 49.5.
- Present value of total debt (percent of GDP, benchmark: 70%): 2022 91.3; 2023 97.1; 2024 84.0; 2025 90.8; 2026 87.5; 2027 83.7; 2028 79.9.
- Nominal GDP (billions of Cabo Verde escudos): 2023 235.0; 2024 266.6; 2025 257.1; 2026 274.7; 2027 293.4; 2028 313.1.
- Gross international reserves (€ millions, end of period): 2023 626; 2024 699; 2025 728; 2026 794; 2027 819; 2028 823.

### Monetary policy and financial sector
- Exchange rate peg: pegged at 110.265 CVE/€ since 1999; policy focus on safeguarding the peg.
- Policy rate changes in 2023:
  - From 0.25 to 1.0 percent in early May 2023.
  - To 1.25 percent in November 2023.
- Monetary aggregates end-June 2023:
  - M2 grew 5.9 percent (y/y).
  - Total deposits grew 6 percent (y/y).
  - Credit to the economy grew 6.3 percent (y/y).
- Financial soundness (end-June 2023):
  - CAR = 21.4 percent (down from 22.2 percent at end-December 2022; regulatory minimum 12 percent).
  - Return on equity = 9.2 percent; return on assets = 0.9 percent.
  - NPLs = 8.7 percent of total loans at end-June 2023 (from 7.8 percent at end-2022).
  - Credit at risk indicator: 18.7 percent at end-June 2023 vs 14.9 percent in June 2022.

### Risks and vulnerabilities
- Downside risks:
  - Weakened demand in major tourism markets.
  - External price shocks and geopolitical risks.
  - Failure to advance SOE reforms or reduced fiscal consolidation.
  - Climate change effects (recent droughts); country among most vulnerable to climate change.
- Debt vulnerabilities:
  - High risk of overall debt distress remains a source of vulnerability.
  - Continued concessional financing from multilateral creditors is important.
- Upside potential:
  - Stronger tourism growth could raise overall economic activity.

### Fiscal policy stance and public finances (selected fiscal figures)
- Fiscal outcomes and projections:
  - Primary deficit projected at 1.1 percent of GDP in 2023.
  - Primary deficit under draft 2024 budget: 0.7 percent of GDP; program includes primary deficit of 1.1 percent of GDP.
  - Net external financing projected at 4 percent of GDP for 2023.
  - Net domestic financing projected to trend downwards.
- Selected fiscal table exact figures (Millions of CVE; Percent of GDP):
  - Revenue 2023: 64,237; 27.8 Percent of GDP.
  - Revenue 2024 Draft Budget: 77,050; 26.9 Percent of GDP.
  - Taxes 2023: 44,349; 19.2 Percent of GDP.
  - Grants 2023: 5,225; 2.3 Percent of GDP.
  - Expenditure 2023: 77,220; 33.4 Percent of GDP.
  - Expense 2023: 66,022; 28.6 Percent of GDP.
  - Net acquisition of nonfinancial assets 2023: 11,198; 4.8 Percent of GDP.
  - Primary balance 2023 (2nd Review-SR): -7,106; -3.1 Percent of GDP.
  - Primary balance 2023 (Proj.): -2,948; -1.1 Percent of GDP.
  - Overall balance 2023 (Proj.): -8,826; -3.4 Percent of GDP.
  - Financing needs 2023 (Proj.): 10,194; 4.0 Percent of GDP.
  - Net external financing 2023: 4,416; 1.9 Percent of GDP.
  - Public debt (percent of GDP) 2022: 127.1; end-2023 forecast: 119.9.

### Revenue mobilization and tax policy measures (exact values preserved)
- Tax revenue to GDP ratio 2023 (second review): 18.1
- Change in nominal GDP (rebasing): 0.8
- Tax revenue to GDP ratio 2023 (third review): 18.9
- Tax administration measures 2024: 0.5
- VAT arrears collection: 0.2
- Income tax arrears collection: 0.1
- Electronic invoicing: 0.1
- Personal income tax arrears collection: 0.1
- Tax policy measures 2024: 0.3
  - International arrivals tax: 0.1
  - Increase of tobacco and alcohol lump-sum tax: 0.2
- Tax policy measures 2025: 0.9
  - Reduction in tax expenditures and ECOWAS implementation: 0.9
- Tax revenue to GDP ratio 2025: 20.5
- Digitization potential: VAT electronic auditing system could potentially contribute up to 1 percent of GDP.
- Tax arrears from SOEs comprise 24 percent of the total.
- Policy recommendations: repeal incentives in the financial sector; abolish duplicated tax incentives; rationalize VAT-exempt products and deductions to the personal income tax base.

### Public debt, financing flows, and DSA findings
- Financing flows (Text Table 4 exact entries, Millions of CVE; Percent of GDP):
  - Total financing needs 2023: 10,194; 4.0 Percent of GDP.
  - Total financing needs 2024: 9,839; 3.6 Percent of GDP.
  - Domestic Financing (Net) 2023: (214); (0.1) Percent of GDP.
  - External financing (Net) 2023: 10,408; 4.0 Percent of GDP.
  - Disbursements 2023: 21,014; 8.2 Percent of GDP.
  - Of which budget support 2023: 11,477; 4.5 Percent of GDP.
  - IMF 2023 disbursements: 2,744; 1.1 Percent of GDP (Of which RSF 2,121; 0.8 Percent of GDP).
  - World Bank 2023 disbursements: 4,487; 1.7 Percent of GDP.
  - Amortization 2023: 10,606; 4.1 Percent of GDP.
  - Note: In 2023 net domestic financing includes SDR's converted to domestic deposits amounting about 0.6 percent of GDP.
- DSA risk assessment:
  - Risk of external debt distress: Moderate.
  - Overall risk of debt distress: High.
  - PV of PPG external debt-to-GDP and other indicators presented in projection tables (see Projections section).

### SOE support, risks, and reforms (Box 3 and related)
- SOE fiscal support and magnitudes:
  - Combined fiscal support via on-lending and capitalization averaged about 2.4 percent of GDP during 2015-2022.
  - On-lending loans to SOEs averaged around 1.4 percent of GDP (mainly to Electra and TACV).
  - Capitalization flows averaged about 1 percent of GDP (mainly to TACV).
- Recent data and monitoring:
  - October 2023: MoF launched the SOE Manager IT platform for real-time monitoring.
  - Explicit subsidies to SOEs: end-2022 = 0.2 percent of GDP; budgeted 2023 = 0.4 percent of GDP.
  - Stock of SOEs’ domestically guaranteed debt jumped to about 8 percent of GDP after the pandemic.
  - Tax arrears from SOEs comprise 24 percent of the total.
- Strategy and policy recommendations:
  - Revise business plans of key SOEs to increase profitability (bottom-up approach).
  - Speed up privatization agenda and improve financial performance of loss-making enterprises.
  - Planned restructuring around nine SOEs during 2023–26 (privatization, partial sale, concessions, PPPs).
  - Privatization in banking and pharmaceutical sectors delayed to 2024.
  - Broaden public debt coverage to include domestically guaranteed SOE debt and improve PPP framework.

### RSF access, financing implications, and capacity to repay
- Eligibility and proposed access:
  - Cabo Verde eligible for RSF; Group A; proposed access 100 percent of quota (SDR 23.7 million or about $31.7 million) for 18 months.
- Macro-fiscal effects of RSF:
  - RSF disbursements increase external financing by about CVE 2.1 billion in 2024 and 1 CVE billion in 2025.
  - RSF substitutes more expensive domestic financing with cumulative estimated savings in debt service of 0.7 percent of GDP until 2028.
  - From a BoP perspective, RSF disbursements increase international reserves by disbursement amounts in 2024 and 2025.
- Capacity to repay indicators (staff assessment):
  - Fund credit outstanding will peak at 380 percent of quota by 2025.
  - Credit outstanding would peak at about 4.1 percent of GDP, 13.4 percent of gross international reserves, and 11.8 percent of exports by 2025.
  - Annual repayments to the Fund would peak at 1.3 percent of exports, 1.8 percent of reserves, and almost 10.9 percent of PPG external debt service, all in 2029.
  - Staff assess Cabo Verde’s capacity to repay as adequate.

### Monitoring, conditionality, and TMU arrangements
- Program monitoring:
  - Quantitative performance criteria, indicative targets, and structural benchmarks to be used; TMU defines data and reporting.
  - Program review schedule:
    - Fourth review: March 2024 (end-December 2023 test date).
    - Fifth review: October 2024 (end-June 2024 test date).
    - Sixth review: March 2025 (end-December 2024 test date).
  - Monitoring cadence: semi-annual IMF Executive Board reviews.
- Key TMU definitions and rules (selected):
  - Program exchange rate: CVE 98.8 per one USD for converting USD-denominated items.
  - Net Other Liabilities definition (includes deposits, onlending, capitalization, other assets, privatization proceeds); deposits redefined from stock to flow per TMU modification.
  - Ceiling on PV of new external concessional debt; concessional debt defined by grant element ≥ 35 percent; unified discount rate 5 percent used for PV.
  - Zero ceiling on non-concessional external debt (continuous).
  - Floor on gross international reserves (GIR) of BCV; GIR reporting monthly with up to four-week lag.
  - Non-accumulation of domestic and external payments arrears (continuous targets).
  - Indicative floor on central government social spending (education, health, social protection excluding wages).

### Risk Assessment Matrix — selected risks and policy responses
- Conjunctural risks:
  - Intensification of regional conflicts: Relative Likelihood: High; Impact: High. Policy response: slow unwinding of policy support; create fiscal space via spending review and tax mobilization.
  - Abrupt global slowdown or recession: Relative Likelihood: Medium; Impact: Medium. Policy response: maintain reserves, fiscal consolidation, rely on concessional financing, standby to tighten monetary policy.
  - Commodity price volatility: Relative Likelihood: High; Impact: High. Policy response: build external buffers; accelerate renewable energy transition; improve targeted support to vulnerable groups.
- Structural risks:
  - Deepening geoeconomic fragmentation: Relative Likelihood: High; Impact: High. Policy response: prioritize limited fiscal resources; accelerate structural reforms to enhance competitiveness.
  - Cyberthreats: Relative Likelihood: Medium; Impact: Medium. Policy response: strengthen information security and financial supervision.
  - Extreme climate events: Relative Likelihood: Medium; Impact: Medium/High. Policy response: build resilience; prioritize climate-resilient public investments; improve building codes.
- Domestic risks:
  - Faltering fiscal consolidation: Relative Likelihood: Medium/High; Impact: High. Policy response: advance revenue reforms, improve PIM, contain non-priority spending, accelerate SOE reforms.
  - Delays in structural reforms/SOE restructuring: Relative Likelihood: Medium; Impact: Medium. Policy response: follow through on SOE plans and expand productivity-enhancing reforms.

### Adaptation, investment needs, and climate policy priorities
- Investment needs:
  - Total estimated investment requirement for adaptation and mitigation over next decade: about USD 2 billion (public and private).
  - This equals almost 6.1 percent of GDP a year vs projected annual public investment budget of about 3.8 percent of GDP.
- Energy sector priorities: wind and solar capacity, energy storage, grid reinforcement, e-mobility, energy efficiency.
- Water sector priorities: sustainable energy for desalination and distribution, network infrastructure, desalination capacity, wastewater treatment and recovery.
- Service provision and tariff design:
  - Operators need cost-of-service compensation via tariffs and/or targeted government transfers (social tariff).
  - Recommendation to expand social registry and design compensating targeted transfers.
- Climate objectives:
  - Reduce domestic GHG emissions by 18 percent unconditional (24 percent conditional) compared to 2019 BAU by 2030.
  - Aim for net-zero emissions by 2050.
- Governance gaps:
  - Need stronger cross-government coordination and a high-level public institution to lead climate policy and DRM.
  - RSF to support national climate finance mobilization strategy, pipeline of appraised projects, and Climate and Nature Fund seeded by Portugal debt-for-financing swap.

### Staff appraisal, recommendations and priorities
- Staff supports completion of third ECF review and authorities’ request for 18-month RSF, citing commendable performance.
- Key staff recommendations and priorities:
  - Fiscal policy: balance consolidation to put debt on downward path while protecting vulnerable and investing in priority projects; progress on domestic revenue mobilization, streamlining tax exemptions, improving PIM, and debt management.
  - SOE reforms: steady progress critical to reduce fiscal risks and improve services; accelerate privatizations and restructuring.
  - Monetary policy/BCV governance: continue safeguarding the peg; improve BCV autonomy, governance and accountability; submit BCV organic law amendments to parliament (SB end-July 2024).
  - Financial sector: resolve NPLs, strengthen AML/CFT framework, and develop climate disclosures and bank roadmaps.
  - Structural reforms and climate resilience: implement RSF RMs, leverage synergies with other official financing, and catalyze private climate finance.

### Program outlook and concluding observations
- Program financing: fully financed with firm commitments for next 12 months and good prospects thereafter; additional financing from development partners and MDBs expected.
- Expected medium-term outcomes:
  - Gross international reserves projected to reach 6.1 months of prospective imports in 2023 and remain around 5.5 months in medium term.
  - Staff encourages continued fiscal consolidation aiming to reduce debt-to-GDP toward about 94 percent by 2028.
- Overall assessment: Program provides a framework to address macro stability and climate vulnerabilities; successful implementation hinges on revenue mobilization, SOE reforms, concessional financing, and catalytic use of RSF resources.

_Italic: IMF staff report and Executive Board statement on Cabo Verde — Third Review under the Extended Credit Facility Arrangement, request for modification of performance criteria, and request for an arrangement under the Resilience and Sustainability Facility (November–December 2023); Cabo Verde authorities and IMF staff projections as presented in the provided document._

### 23.69 million, about US$31.45 million).

### CABO VERDE: THIRD REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA, AND REQUEST FOR AN ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY

### Context and outlook
- Post-Covid economic activity recovered as tourism returned to the islands; the economy rebounded growing at 6.4 percent in 2021 and 17 percent in 2022.
- The Nationally Determined Contribution (NDC) estimates total funding required for climate adaptation and mitigation activities at USD 2 billion between now and 2030, equivalent to about 6.1 percent of GDP per year.
- The authorities requested support under the Resilience and Sustainability Facility (RSF) to address climate vulnerabilities and catalyze concessional and private finance for climate adaptation and transition.
- The RSF arrangement requested is SDR 23.69 million (100 percent of quota, approximately US$31.45 million).

### Program performance and approvals
- The Executive Board completed the Third Review of Cabo Verde’s performance under the 36-month Extended Credit Facility (ECF) arrangement approved on June 15, 2022, and approved an 18-month arrangement under the RSF.
- The completion of the third review allows the authorities to draw the equivalent of SDR 4.5 million (about US$6 million).
- In completing the third review, the Executive Board approved the authorities’ request for modification of the end-December 2023 and end-June 2024 performance criteria.
- All quantitative performance criteria (QPCs) for end-June 2023 were met. The indicative targets (ITs) for end-March and end-June 2023 were met. Structural benchmarks (SBs) for end-June, end-July, and end-September 2023 were met.
- The ECF will expire in June 2025. A new set of end-December 2024 PCs and end-September 2024 ITs is proposed.

### RSF objectives and reform areas
- The RSF-supported program will support reform measures in five areas:
  - (i) strengthening climate change policy governance;
  - (ii) improving physical and fiscal resilience;
  - (iii) strengthening mitigation and resilience through promoting energy efficiency and transition to renewables;
  - (iv) promoting adaptation by ensuring ecological and economic sustainability of water resources and planning for long-run climate impacts;
  - (v) strengthening financial sector resilience to climate change.

### Recent macroeconomic developments (selected quantitative findings)
- Real GDP growth:
  - 2021: 6.4 percent (rebound note)
  - 2022: 17 percent
  - H1-2023: 5.8 percent year-on-year (y/y)
  - Projected 2023: 4.5 percent (table: Real GDP series shows multiple entries; the staff report highlights moderation)
- Inflation:
  - December 2022: 7.6 percent (end of period)
  - End-August 2023: 2.9 percent (y/y)
  - Projected end-2023: 3 percent (statement) / table shows Consumer price index (end of period) 3.0 percent for 2023 in projections
- External and reserves:
  - ECF disbursements of SDR 15.76 million (66.5 percent of quota, about US$21.19 million) boosted reserves.
  - Gross international reserves grew to around €639 million at end-September 2023.
  - Gross international reserves (months of prospective imports of goods and services) in table: 2023 = 5.7 months; projected 2024 = 6.1 months.
- Fiscal performance H1-2023:
  - Tax revenues increased 22.6 percent (1H2023/1H2022).
  - Primary balance over 1H2023 registered a surplus of CVE 2,759 million compared with the CVE -4,141 million program target (1H2023).

### Projections and key statistics (preserve table values where cited)
- Real GDP projections (selected from table): 2023 Proj. 4.5; 2024 Proj. 4.7; 2025 Proj. 4.7; 2026 Proj. 4.6; 2027 Proj. 4.6; 2028 Proj. 4.5.
- Consumer price index (end of period) projections: 2023 3.0; 2024 2.0; 2025 2.0; 2026 2.0; 2027 2.0; 2028 2.0.
- Exports of goods and services (annual percent change): 2023 3.2; 2024 8.7; 2025 9.5; 2026 9.4; 2027 8.7; 2028 8.1.
- Imports of goods and services (annual percent change): 2023 10.2; 2024 9.8; 2025 7.0; 2026 5.4; 2027 6.0; 2028 4.9.
- External current account (including official transfers) as percent of GDP: 2023 -5.9; 2024 -6.1; 2025 -6.3; 2026 -5.8; 2027 -5.4; 2028 -4.6.
- Total nominal government debt (percent of GDP): 2022 121.2; 2023 127.1; 2024 112.6; 2025 119.9; 2026 116.2; 2027 111.2; 2028 105.4.
- Present value of PPG external debt:
  - Percent of GDP: 2023 53.5; 2024 50.9; 2025 54.2; 2026 53.3; 2027 52.0; 2028 49.5.
  - Percent of exports: 2023 163.8; 2024 156.6; 2025 161.4; 2026 156.1; 2027 148.6; 2028 137.8.
- Present value of total debt (percent of GDP, benchmark: 70%): 2022 91.3; 2023 97.1; 2024 84.0; 2025 90.8; 2026 87.5; 2027 83.7; 2028 79.9.
- Memorandum: Nominal GDP (billions of Cabo Verde escudos): 2023 235.0; 2024 266.6; 2025 257.1; 2026 274.7; 2027 293.4; 2028 313.1.
- Gross international reserves (€ millions, end of period): 2023 626; 2024 699; 2025 728; 2026 794; 2027 819; 2028 823.

### Monetary policy and financial sector
- Monetary policy focus: safeguarding the peg to the Euro (Cabo Verdean exchange rate pegged at 110.265 CVE/€ since 1999).
- Policy rate increases in 2023:
  - From 0.25 to 1.0 percent in early May 2023.
  - To 1.25 percent in November 2023.
- Monetary aggregates end-June 2023:
  - M2 grew at 5.9 percent (y/y).
  - Total deposits grew 6 percent (y/y).
  - Credit to the economy grew 6.3 percent (y/y).
- Financial soundness indicators (end-June 2023):
  - Regulatory capital to risk-weighted assets (CAR) = 21.4 percent (down from 22.2 percent at end-December 2022; regulatory minimum 12 percent).
  - Return on equity = 9.2 percent; return on assets = 0.9 percent (down from 16 and 1.5 percent at end-December 2022).
  - NPLs increased from 7.8 percent at end-2022 to 8.7 percent of total loans at end-June 2023.
  - Credit at risk indicator: 18.7 percent at end-June 2023 vs 14.9 percent in June 2022.

### Risks and vulnerabilities
- Downside risks to the outlook:
  - Weakened demand in major tourism markets.
  - External price shocks.
  - Failure to advance State-Owned Enterprise (SOE) reforms or reduced fiscal consolidation efforts.
  - Climate change effects, evidenced by recent years of drought; climate change is a key medium-term risk.
- Debt vulnerabilities:
  - The country’s high risk of overall debt distress is a source of vulnerability; concessional financing to limit debt servicing cost is important.
- Upside:
  - Stronger tourism growth could lead to higher overall economic activity.

### Policy recommendations and priorities (as conveyed in Executive Board statement)
- Fiscal policy:
  - Maintain an appropriate balance between fiscal consolidation to put debt on a downward path, while protecting the vulnerable and investing in key priority projects for future growth.
  - Medium-term fiscal objectives depend on progress in domestic revenue mobilization, streamlining tax exemptions, increasing effectiveness of public investment projects, and improving debt management.
- SOE reforms:
  - Steady progress on SOE reforms remains critical for reducing fiscal risks and improving services.
- Monetary and central bank governance:
  - Continue focusing monetary policy on safeguarding the peg.
  - Improve the autonomy, governance and accountability framework of the central bank.
- Financial sector:
  - Continue working with banks to facilitate resolution of NPLs.
  - Strengthen the AML/CFT framework and its effectiveness.
- Structural reforms and climate resilience:
  - Continue ambitious structural reform agenda to adapt to climate change, reduce the cost of doing business, and accelerate public enterprise reforms.
  - Pursue the RSF reform measures and leverage synergies with other official financing to catalyze further public and private financing for climate mitigation and adaptation efforts.

*Source: IMF staff report and Executive Board statement on Cabo Verde — Third Review under the Extended Credit Facility Arrangement, request for modification of performance criteria, and request for an arrangement under the Resilience and Sustainability Facility (November–December 2023).*

### 5.      Cabo Verde’s near-term economic outlook remains favorable but has moderated from

### 1cpvea2024001 - 5.      Cabo Verde’s near-term economic outlook remains favorable but has moderated from

### Near-term growth and inflation outlook
- Real GDP growth projected at 4.5 percent in 2023.
- Economy projected to grow at 4.7 percent in 2024.
- Convergence to potential growth of 4.5 percent after 2028, conditional on structural reforms lifting potential growth.
- Inflation projected to moderate to 3 percent in 2023 and decline to 2 percent over the medium-term, broadly in line with Euro area inflation.

### External sector and current account
- Current account deficit expected to widen to about 5.9 percent of GDP in 2023 as exports of goods and services, tourism, and remittances slow down over Q2 and Q3 from 2022 levels.
- Medium-term widening of the current account deficit driven by implementation of RSF reform measures and imports of low carbon technologies.
- FDI projected to improve in the medium term in line with catalytic impact of the RSF, the EU Gateway program and growth in the tourism sector.
- External Sector Assessment indicates Cabo Verde’s external position in 2022 was substantially stronger than implied by fundamentals and desirable policies, pointing to an undervaluation of the real effective exchange rate.

### Risks to the outlook
- Downside risks: weakened demand in major tourism markets, external price shocks, geopolitical risks, climate risks evidenced by recent droughts.
- Fiscal risks: failure to advance State-Owned Enterprise (SOE) reforms or reduced fiscal consolidation efforts.
- Debt vulnerability: country’s high risk of overall debt distress; concessional financing important to limit debt servicing cost.
- Upside: stronger tourism growth could lead to higher overall economic activity.

### Potential GDP sensitivity and pandemic scarring (Box 1)
- Production function: Cobb-Douglas Y_t = A_t K_t^α L_t^{1−α}; capital evolves K_t = (1−δ)K_{t−1} + I_t.
- Capital share α set to 37 percent (historical average 2015-2019).
- Capital-to-GDP ratio calibrated at its 2018 level 4.66 according to the Penn World Table.
- Employed population growth: projected to drop to about 0.8 percent over the next two decades, down from an average of 1.2 percent in the 2010s.
- If productivity continues to grow at 1.6 percent and investment share of GDP remains around 28 percent, potential GDP projected around 4.1 percent.
- To lift potential growth to about 7 percent, productivity growth must rise to at least 4.5 percent, given current high investment rate.
- If growth increases to around 7 percent, the scarring effect of the pandemic may vanish by 2028.
- Baseline assumes a permanent gap between forecasted GDP level and pre-COVID trend absent structural reforms to enhance TFP and unlock private investments.

### Fiscal policy stance and public finances (ECF Arrangement)
- Primary deficit projected at 1.1 percent of GDP in 2023, an improvement relative to the second review.
- Delayed airport concession fee (1.4 percent of GDP and already in the baseline) was received in 3Q2023.
- Compositional shift: subsidies increase by 0.2 percent of GDP to support basic food staples imports, inter-island transportation company, and energy/water SOEs for social tariffs.
- Gross financing needs projected marginally lower than in 2022, with shift toward external financing.
- Net external financing projected at 4 percent of GDP for 2023, higher than 2022 outturn.
- Net domestic financing projected to continue trending downwards.
- Postponement of privatization in banking and pharmaceutical sectors to 2024 explains higher-than-expected GFNs relative to 2nd review.

### 2024 draft budget and medium-term fiscal framework
- Draft 2024 budget assumes higher tax collection of CVE 1.3 billion relative to staff projections.
- Grants increase in 2024 due to additional bilateral contracts; other revenues improve due to higher concessional, fee, and penalties incomes.
- Budgeted primary expenditures in line with staff projections; wage bill projected to grow above inflation.
- Draft budget primary deficit 0.7 percent of GDP; program includes primary deficit of 1.1 percent of GDP.
- Higher investments in 2024 related to RSF’s RMs 5 and 6 financed via higher grants, concession fees, and tax revenue.
- Additional CVE 1 billion capital spending relative to the second review.
- Spending-to-GDP ratio changes slightly reflecting revised nominal GDP series.
- Authorities agreed improved execution of public investment plans is important for growth.
- SOE reforms expected to reduce capitalization and on-lending starting in 2025.

### Fiscal tables — selected exact figures (relevant entries from Text Table 1)
- Revenue 2023: 64,237 Millions of CVE, 27.8 Percent of GDP.
- Revenue 2024 Draft Budget: 77,050 Millions of CVE, 26.9 Percent of GDP.
- Taxes 2023: 44,349 Millions of CVE, 19.2 Percent of GDP.
- Grants 2023: 5,225 Millions of CVE, 2.3 Percent of GDP.
- Expenditure 2023: 77,220 Millions of CVE, 33.4 Percent of GDP.
- Expense 2023: 66,022 Millions of CVE, 28.6 Percent of GDP.
- Net acquisition of nonfinancial assets 2023: 11,198 Millions of CVE, 4.8 Percent of GDP.
- Primary balance 2023 (2nd Review-SR): -7,106 Millions of CVE, -3.1 Percent of GDP.
- Primary balance 2023 (Proj.): -2,948 Millions of CVE, -1.1 Percent of GDP.
- Overall balance 2023 (Proj.): -8,826 Millions of CVE, -3.4 Percent of GDP.
- Financing needs 2023 (Proj.): 10,194 Millions of CVE, 4.0 Percent of GDP.
- Net external financing 2023: 4,416 Millions of CVE, 1.9 Percent of GDP.
- Public debt (percent of GDP) 2022: 127.1; end-2023 forecast: 119.9.
- Public debt improves to 116.5 percent in 2024 with higher public investment.

### Revenue mobilization and tax policy measures (Text Table 3 and Box 2)
- Tax revenue to GDP ratio 2023 (second review): 18.1
- Change in nominal GDP (rebasing): 0.8
- Tax revenue to GDP ratio 2023 (third review): 18.9
- Tax administration measures 2024: 0.5
- VAT arrears collection: 0.2
- Income tax arrears collection: 0.1
- Electronic invoicing: 0.1
- Personal income tax arrears collection: 0.1
- Tax policy measures 2024: 0.3
- International arrivals tax: 0.1
- Increase of tobacco and alcohol lump-sum tax: 0.2
- Tax policy measures 2025: 0.9
- Reduction in tax expenditures and ECOWAS implementation: 0.9
- Tax revenue to GDP ratio 2025: 20.5
- Tax policy recommendations: repeal incentives in the financial sector; abolish duplicated tax incentives; rationalize VAT-exempt products and deductions to the personal income tax base.
- Digitization potential: VAT electronic auditing system could potentially contribute up to 1 percent of GDP (optimistic estimate).
- Tax arrears from SOEs comprise 24 percent of the total.

### Public debt, borrowing program, and financing (Text Table 2 and Text Table 4)
- PPG external debt contracted or guaranteed — concessional debt sources and projected uses shown in Text Table 2 (values presented in USD million and present value terms in the source tables).
- External borrowing uses split: Infrastructure and Budget financing (examples in source tables).
- Text Table 4 — Selected financing flows (Millions of CVE, Percent of GDP):
  - Total financing needs 2023: 10,194 Millions of Escudos, 4.0 Percent of GDP.
  - Total financing needs 2024: 9,839 Millions of Escudos, 3.6 Percent of GDP.
  - Domestic Financing (Net) 2023: (214) Millions of Escudos, (0.1) Percent of GDP.
  - External financing (Net) 2023: 10,408 Millions of Escudos, 4.0 Percent of GDP.
  - Disbursements 2023: 21,014 Millions of Escudos, 8.2 Percent of GDP.
  - Of which budget support 2023: 11,477 Millions of Escudos, 4.5 Percent of GDP.
  - IMF 2023 disbursements: 2,744 Millions of Escudos, 1.1 Percent of GDP (Of which RSF 2,121 Millions of Escudos, 0.8 Percent of GDP).
  - World Bank 2023 disbursements: 4,487 Millions of Escudos, 1.7 Percent of GDP.
  - Amortization 2023: 10,606 Millions of Escudos, 4.1 Percent of GDP.
  - Note: In 2023 net domestic financing includes SDR's converted to domestic deposits amounting about 0.6 percent of GDP.

### Debt sustainability assessment and role of concessional financing
- Joint World Bank/IMF DSA: risk of external debt distress remains moderate under the ECF/RSF; overall risk of debt distress remains high.
- Public debt assessed as sustainable due to manageable debt service from favorable debt structure based largely on fixed interest rates.
- Sustaining gains in debt sustainability requires continued concessional funding from multilateral creditors.

### SOE reforms and fiscal risks
- SOEs present major risk for budget resources and financing needs.
- Recent SOE reforms include quarterly publications on fiscal risk analysis (“health check”) and SOE budget execution; launch of SOE Manager platform with financial data in real time.
- Authorities plan to restructure around nine SOEs during 2023–26 via privatization, partial sale, concessions, and PPPs across water and electricity, naval services, ports, telecom, and air transportation.
- Planned reforms include broadening public debt coverage to include domestically guaranteed SOE debt and improving PPP framework with FAD assistance.
- Privatization in banking and pharmaceutical sectors delayed to 2024.
- Coverage of fiscal risk reporting to be broadened to cover PPPs (proposed new SB, end-September 2024).

*Source: Cabo Verde authorities and IMF staff projections as presented in the provided document.*

### Box 3. Fiscal Support to SOEs

### Box 3. Fiscal Support to SOEs

### Data and monitoring improvements
- In October 2023, the MoF launched the SOE Manager, an IT platform developed with the support of the WB and IMF that will allow for the monitoring and evaluation of the SOE sector's performance by automating data collection, processing, and analysis.
- The new dashboard provides important data for properly designing further reforms to reduce the support of the central government to SOEs through explicit subsidies, new guarantees, on-lending, and capitalization (Table 1).

### Explicit subsidies and recent trends
- Explicit subsidies to SOEs have increased after the pandemic.
- At end-2022, these subsidies reached 0.2 percent of GDP and are budgeted to increase to 0.4 percent in 2023.
- The increase is due to compensation to: i) the inter-island transportation company, and ii) energy/water SOEs to implement the social tariff for energy and water targeted at poor households.

### Fiscal risks from guaranteed debt and quasi-fiscal operations
- Fiscal risks from SOEs' domestically guaranteed debt have grown over time.
- Before the pandemic, the stock of SOEs’ domestically guaranteed debt remained stable, but there were significant transactions below the line to SOEs via on-lending and capitalization.
- After the pandemic, the stock of SOEs’ domestically guaranteed debt jumped to about 8 percent of GDP, while quasi-fiscal flows decreased.
- The DSA for Cabo Verde captures the flows stemming from quasi-fiscal operations, while the stock of SOEs’ domestically guaranteed debt is captured only through the contingent liability shock.

### On-lending and capitalization: magnitudes and recipients
- The combined fiscal support via on-lending and capitalization was an average of about 2.4 percent of GDP during 2015-2022.
- On-lending loans to SOEs totaled on average of around 1.4 percent of GDP that were mainly channeled to Electra and TACV.
- Capitalization flows, in turn, were on average about 1 percent of GDP mainly directed to back TACV.

### Strategy and policy recommendations
- Further improvements in the strategy to reduce the fiscal support to SOEs are welcome.
- Current focus: a bottom-up approach by revising the business plan of key SOEs to increase their profitability.
- Example: capitalization expenditures to support TACV are projected to cease in 2025 reflecting the current company business plan which aims to increase routes.
- Additional efforts needed:
  - Speed up the privatization agenda.
  - Improve the financial performance of loss-making enterprises to reduce the fiscal support to SOEs.

*Box 3. Fiscal Support to SOEs — 1cpvea2024001*

### 31.      The RSF aims to support steering private finance towards a low-carbon climate-

### 31. The RSF aims to support steering private finance towards a low-carbon climate-resilient economy, while strengthening financial sector resilience to climate-related risks

### RSF objectives and proposed climate-finance measures
- Objective: Support steering private finance towards a low-carbon climate-resilient economy and strengthen financial sector resilience to climate-related risks.
- Given the strong role of the banking sector in Cabo Verde, measures include adoption by the BCV of guidelines to monitor banks’ assessment and disclosure of climate-related risks and opportunities (RM9).
- Proposed reforms and measures:
  - Design of a climate information architecture for banks (taxonomy and climate disclosures).
  - Promote climate resilience among financial institutions to unlock private sector climate financing and scale up private climate finance, aligned with messages in the Global Financial Stability Report (October 2023).
  - Use of recent debt-for-financing swap agreement with Portugal to provide seed money for a Climate and Nature Fund; ensure the Fund is a subaccount in the Treasury and develop financial regulations for transparent governance and use of resources.
- Analytical and diagnostic inputs informing RMs: C-PIMA, 2017 Climate Change Policy Assessment (CCPA), and the 2021 NDC.

### Program performance, conditionality, and structural benchmarks
- Performance under the current ECF program:
  - All quantitative performance criteria (QPCs) for end-June 2023 were met.
  - Indicative targets (ITs) for end-March and end-June 2023 were met.
  - Structural benchmarks (SBs) for end-June, end-July, and end-September 2023 were met.
  - The ECF will expire in June 2025.
  - A new set for end-December 2024 PCs and end-September 2024 ITs is proposed.
- Requested technical/definition modifications supported by staff:
  - Modification of the PC on the PV of new external debt for end-December 2023 reflecting the latest World Bank disbursement schedule.
  - Clarification of the definition of government deposits under other net liabilities in the TMU (change from a stock to a flow).
  - Modification of the PC on other net liabilities in December 2023 and June 2024 to reflect the delay in privatization receipts from 2023 to 2024; staff supportive given privatization proceeds are uncertain.
- Additional conditionality proposed:
  - New SB for end-September 2024 to broaden coverage of fiscal risk analysis and reporting to include PPPs.
  - Safeguards-linked SB: submission of the BCV organic law to parliament for end-July 2024.

### Proposed RSF access and financing implications
- Eligibility and access:
  - Cabo Verde is eligible for the RSF and belongs to Group A.
  - Proposed access level: 100 percent of quota (SDR 23.7 million or about $31.7 million), for an 18-month duration, based on the package of RMs.
- Use and macro-fiscal effects of RSF resources:
  - RSF disbursements increase external financing by about CVE 2.1 billion in 2024 and 1 CVE billion in 2025.
  - RSF substitutes more expensive domestic financing with cumulative estimated savings in debt service of 0.7 percent of GDP until 2028.
  - These savings intended to help build buffers, increase resilience to climate-related shocks, create fiscal space, and support critical climate-related public investment.
  - From a BoP perspective, RSF disbursements increase international reserves by the disbursement amounts in 2024 and 2025, respectively.
- Financing outlook:
  - The Fund-supported program continues to be fully financed with firm commitments for the next 12 months and good prospects for adequate financing for the remainder of the program.
  - Additional financing in the second and third year of the ECF comes from budget support by development partners and MDBs, including the World Bank and the African Development Bank.
  - Global Gateway, the EU and European Investment Bank (EIB) recently announced significant support, though phasing is not yet finalized.

### Capacity to repay, program exposures, and risks
- Assessment of capacity to repay:
  - Fund credit outstanding will peak at 380 percent of quota by 2025.
  - Credit outstanding would peak at about 4.1 percent of GDP, 13.4 percent of gross international reserves, and 11.8 percent of exports by 2025.
  - Annual repayments to the Fund would peak at 1.3 percent of exports, 1.8 percent of reserves, and almost 10.9 percent of PPG external debt service, all in 2029.
  - Staff assess Cabo Verde’s capacity to repay as adequate.
- Risks to the program:
  - Overall risk level assessed as moderate.
  - Worsened global outlook and spillovers from the war in Ukraine increase risks.
  - High risk of overall debt distress remains a concern.
  - Mitigating factors: authorities’ strong track record under previous Fund programs and current ECF, showing strong program ownership.
  - Policy responses to materialization of risks are set out in the RAM (Annex 1).

### Staff appraisal: macroeconomic outlook, policies, and reform priorities
- Macroeconomic performance and outlook:
  - Tourism arrivals have surpassed pre-pandemic levels with positive impacts in tourism-related sectors.
  - Real growth is expected to be 4.7 percent in 2024.
  - Gross international reserves projected to reach 6.1 months of prospective imports in 2023 and to remain stable around 5.5 months in the medium term.
  - Economy remains vulnerable to external shocks affecting tourism and to climate risks.
- Inflation and monetary policy:
  - Inflation is decreasing but requires close monitoring due to rapid pass-through of global food and fuel prices given high import share in consumption.
  - Monetary tightening was appropriate; policy stance should remain data dependent to safeguard the peg.
  - Staff support cautious step-wise increase in the policy rate and urge BCV vigilance and readiness to tighten further if required.
  - Importance of submitting amendments to the BCV law to parliament emphasized.
- Fiscal policy and fiscal risks:
  - Staff support authorities’ commitment to fiscal consolidation and welcome improvement in the primary balance in 2023.
  - 2024 budget is in line with the program; achievement of medium-term targets depends on adherence to tax and other revenue measures.
  - Fiscal risks from SOEs and PPPs need close monitoring and mitigating measures.
  - Delays in SOE reforms could undermine credibility of the reform agenda and fiscal sustainability.
  - Staff encourages efforts towards continued reduction in the debt-to-GDP ratio to about 94 percent by 2028.
- Financial stability and banking sector:
  - Financial stability indicators have improved: banks’ profitability positive, NPLs on a downward trend since 2016 due to credit recovery, write-offs, and banking prudence.
  - Staff urged authorities to continue working with banks to facilitate resolution of NPLs.
- Reform priorities and role of RSF:
  - Decisive reforms are needed to sustain high, inclusive, and resilient growth, support PEDS II goals, improve connectivity, employment, social development, and a dynamic private sector.
  - Capital spending to accelerate climate action investments and seeking partner support is critical.
  - The RSF supports a transformative reform agenda closely linked to the authorities’ climate change and developmental reform objectives.
- Program implementation details:
  - Staff support modification of the PC on the PV of new external debt for end-December 2023 and definition of deposits under other net liabilities in the TMU as a flow variable.
  - Under the new definition, the use/creation of government deposits to reduce/increase borrowing needs enters net other liabilities in line with authorities’ fiscal accounts.
  - Staff support modification of the PC on other net liabilities in December 2023 and June 2024 to reflect delay in 2023 privatization receipts and the definitional change.

*Source: IMF staff report excerpt.*

### 47.      Staff supports the completion of the third review under the ECF arrangement and the

### 47. Staff supports the completion of the third review under the ECF arrangement and the authorities’ request for an 18-month RSF

### Staff judgment and policy recommendation
- Staff supports the completion of the third review under the ECF arrangement and the authorities’ request for an 18-month RSF.
- The recommendation reflects “commendable performance to tackle medium-term economic challenges and address climate risks.”
- Staff encourages the authorities to leverage the RSF to exploit synergies with other official financing and catalyze further private financing for climate mitigation and adaptation efforts.

### Recent macroeconomic and external developments (high-level findings and projections)
- Economic growth is projected to moderate in 2023 after significant improvements in the tourism sector in 2022.
- Tourism arrivals are projected to increase and remain slightly above pre pandemic levels, resulting in a steady increase in tourism receipts.
- International reserves are projected to remain adequate reflecting steady FDI and higher remittances.
- Headline inflation decreased due to lower food and fuel prices.
- The current account deficit widens slightly in 2023 as exports slow from 2022 highs.
- The financial account is projected to deteriorate, financed by an increase in other investments.
- Remittances are projected to decelerate in 2023 but remain an important source of foreign currency supporting the country’s strong reserve position.

### Fiscal sector: performance, projections, and selected numbers (from Table 3a and Table 3b)
- Central government aggregates (selected levels, Millions of CVE):
  - Revenue (Act. 2022): 52,661
  - Revenue (Proj. 2023): 52,660
  - Revenue (Draft Budget 2024): 65,590
  - Expenditure (Act. 2022): 62,676
  - Expenditure (Proj. 2023): 62,676
  - Expenditure (Draft Budget 2024): 77,359
  - Overall balance (Act. 2022): -10,015
  - Overall balance (Proj. 2023): -10,016
  - Overall balance (Draft Budget 2024): -11,769
  - Financing needs (Act. 2022): 10,188
  - Financing needs (Proj. 2023): 10,189
  - Financing needs (Draft Budget 2024): 9,828
- Key fiscal subcomponents (selected levels, Millions of CVE):
  - Tax revenue (Act. 2022): 44,146
  - Grants (Act. 2022): 2,131
  - Other revenue (Act. 2022): 6,384
  - Expense (Act. 2022): 58,141
  - Net acquisition of nonfinancial assets (Act. 2022): 4,535
  - Primary balance (Act. 2022): -4,639
- Fiscal aggregates as percent of GDP (Table 3b, selected shares):
  - Revenue (Act. 2022): 21.6 percent
  - Revenue (Proj. 2023): 22.4 percent
  - Expenditure (Act. 2022): 25.7 percent
  - Expenditure (Proj. 2023): 26.7 percent
  - Overall balance (Act. 2022): -4.1 percent
  - Overall balance (Proj. 2023): -4.3 percent
  - Financing Needs (Act. 2022): 4.2 percent
  - Financing Needs (Proj. 2023): 4.3 percent
- Memorandum items and RSF effects:
  - Counter factual overall balance without RSF (2026): -9,669 (Millions of CVE)
  - Counter factual overall balance without RSF (2027): -6,819 (Millions of CVE)
  - Counter factual overall balance without RSF (2028): -4,149 (Millions of CVE)
  - Cumulative estimated RSF savings from substituting more expensive domestic financing (2025): 388
  - Cumulative estimated RSF savings from substituting more expensive domestic financing (2026): 956
  - Cumulative estimated RSF savings from substituting more expensive domestic financing (2027): 1,504
  - Cumulative estimated RSF savings from substituting more expensive domestic financing (2028): 2,031
  - Cumulative estimated RSF savings from substituting more expensive domestic financing (beyond): 2,537
- Debt dynamics (Table 3b, selected entries):
  - Debt-to-GDP (Third review): 127.1
  - Debt-to-GDP (later rows): 119.9; 116.2; 111.2; 105.4; 99.4; 93.9
  - Change in debt-to-GDP (Third review) entries include -7.3; -3.6; -5.1; -5.8; -6.0; -5.6
  - Contributions to change in debt-to-GDP (selected): contribution from primary deficit 1.1; 0.0; -1.0; -1.0; -1.0; contribution from real GDP growth -5.5; -5.4; -4.9; -4.3; -4.0; -3.8

### Monetary and financial sector developments (findings)
- At end June 2023 broad money increased slightly due to the increase of domestic assets.
- Credit to the economy increased even with the gradual phasing out of the COVID-19 relief measures.
- The central bank started to adjust its policy rate, narrowing the interest differential with the ECB rates.
- Nonperforming loans increased in Q2 2023, in part reflecting the gradual phasing out of the credit moratorium.

### RSF Reform Measures and climate-related policy priorities (high-level summary)
- Staff notes a “strong and comprehensive package of reforms to address its climate-related challenges.” Key reform areas in the RSF Reform Measures Matrix include:
  - National coordination and management of climate change: establish a council/body for coordinating climate change policy planning and DRM under the Heads of Government; MAE serves as secretariate. Timing: End-April 2024; 4th ECF Review.
  - Fiscal risk management for climate: Ministry of Finance to conduct and publish quantitative analysis of fiscal risks generated by climate change in the annual Fiscal Risk Statement. Timing: End-September 2024; 5th ECF Review.
  - PPP framework and climate requirements: Ministry of Finance to amend PPP legal framework and publish a manual integrating climate requirements throughout the PPP capital project lifecycle. Timing: End-April 2024; 4th ECF Review.
  - Climate finance mobilization and project pipeline: Ministry of Finance to adopt a national climate finance mobilization strategy and publish a pipeline of appraised public capital projects, including climate-related projects. Timing: End-April 2025; 6th ECF Review.
  - Energy sector reforms: determine cost-recovery rate for electricity, assess tariff discrepancies, undertake distributional impact assessment, and publish/adopt regulations for adjusting electricity tariffs to achieve full cost recovery. Timing: End-April 2025; 6th ECF Review.
  - Water sector reforms: determine cost-recovery rate for water, assess tariff discrepancies, undertake distributional impact assessment, and publish/adopt regulations for adjusting water tariffs to achieve full cost recovery, and/or finance infrastructure investment transparently from the budget. Timing: End-April 2025; 6th ECF Review.
  - Social protection strengthening: expand the Unique Social Registry (USR) to 100 percent coverage of poor and vulnerable households and offer inclusion to 100 percent of households in climate vulnerable areas. Timing: End-Nov. 2024; 5th ECF Review.
  - Disaster risk mapping and land-use/building code adjustments: develop and disseminate natural disaster risk and vulnerability maps and amend land use planning regulation and construction code requirements. Timing: End-Nov. 2024; 5th ECF Review.
  - Financial sector climate transparency: BCV to develop a climate information architecture for banks including adoption of a climate taxonomy and publication of disclosure guidelines; banks expected to submit internal roadmaps within six months from application of the guideline and progress reports every six months. Timing: End-Nov. 2024; 6th ECF Review.

### Expected outcomes from RSF-supported reforms
- Improved integrated and effective coordination of climate change activities across public administration.
- Enhanced fiscal planning that accounts for climate-related fiscal risks.
- Stronger PPP framework and reduced fiscal risks from PPPs, enabling climate-sensitive public investment planning and budgeting.
- A robust pipeline of appraised climate and public investment projects to scale up climate investments.
- Energy and water sector financial sustainability through tariff reform and regulatory frameworks enabling private investment.
- Strengthened social safety net to respond to climate hazards and support vulnerable households in the transition.
- Greater transparency on climate risks and opportunities in the financial sector.

_Italic: Sources: Cabo Verdean authorities; and IMF staff estimates and projections._

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Risk Assessment Framework
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path—the scenario most likely to materialize in the view of the Staff.
- The relative likelihood of risks listed is the Staff’s subjective assessment of the risks surrounding this baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent).
- The RAM reflects Staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
- The conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon.

### Conjunctural risks
- Intensification of regional conflict(s)
  - Relative Likelihood: High
  - Impact if Realized: High — “The economy would be hit by disruptions in the supply chain, terms of trade and the tourism sector deteriorate resulting in the balance of payments problems and lower FDI, increase inflation leading to food insecurity and poverty.”
  - Policy Response:
    - Slow down planned unwinding of policy support while ensuring that recovery is well entrenched.
    - Create fiscal space through spending review and tax mobilization for new policies to mitigate supply shocks in the economy.

- Abrupt global slowdown or recession
  - Relative Likelihood: Medium
  - Impact if Realized: Medium — “Recession in key tourist markets would lower tourist arrivals and slow down economic recovery and revenues. Rising core yields and risk premia will increase the cost of new debt and add pressure to foreign reserves and financial account due to a ‘Fly-to-quality’ effect. Rising yields could also reduce the flow of migrant deposits.”
  - Policy Response:
    - Maintain adequate reserves and fiscal consolidation and reliance on concessional financing from bilateral and/or multilateral creditors.
    - Develop contingency plans to lower the impact of delayed recovery.
    - Stand ready to tighten monetary policy.

- Commodity price volatility
  - Relative Likelihood: High
  - Impact if Realized: High — “Worsening of the current account, generating balance of payments problems. Commodity prices increase, especially in oil and food, joint with supply disruptions, leads to a higher inflation, and impacts vulnerable consumers.”
  - Policy Response:
    - Build external buffers and resilience to shocks.
    - Diversification of energy usage (renewable energies transition), to mitigate oil price shocks.
    - Improve effectiveness of government’s targeted supports to vulnerable groups.

### Structural risks
- Deepening geoeconomic fragmentation
  - Relative Likelihood: High
  - Impact if Realized: High — “Cabo Verde is an open economy, highly dependent on trade (food, intermediates, and fuel), remittances and tourism. Hence any disruption on each of these areas is bound to deeply affect economic activity. The impact however could be mitigated by country’s strong international trade ties.”
  - Policy Response:
    - The limited fiscal resources should be prioritized and allocated to investments that increase diversification across tourism source markets.
    - Contingency planning should be undertaken in anticipation of operational or financial disruptions.
    - Accelerate the implementation of structural reforms to support international competitiveness and productivity.

- Cyberthreats
  - Relative Likelihood: Medium
  - Impact if Realized: Medium — “Cyber-attacks could generate weaker confidence, cause instability in the financial system and disrupt domestic activity.”
  - Policy Response:
    - Strengthen information security particularly in the government sector.
    - Improve financial regulation and supervision to enhance the resilience of the financial system.

- Extreme climate events
  - Relative Likelihood: Medium
  - Impact if Realized: Medium/High — “Prolonged drought or other climate-related shocks would undermine agricultural production with negative impact on GDP growth and inflation.”
  - Policy Response:
    - Build resilience to weather-related shocks and accelerate growth-enhancing reforms.
    - Prioritize public investments projects resilient to climate change, improve risk management and building codes.

### Domestic risks
- Faltering fiscal consolidation efforts
  - Relative Likelihood: Medium/High
  - Impact if Realized: High — “Delayed fiscal consolidation efforts and SOEs reforms would undermine macroeconomic stability and hinder the return to pre-COVID medium-term fiscal and debt sustainability trajectory.”
  - Policy Response:
    - Unwind temporary measures, advance revenue-enhancing reforms, improve capital expenditure management, reduce fiscal risks, notably linked to SOEs, and contain non-priority spending.

- Delays in implementing measures to increase productivity and restructure SOEs
  - Relative Likelihood: Medium
  - Impact if Realized: Medium — “Delays in advancing the structural reform agenda after COVID-19 would hinder competitiveness, potential GDP growth and employment.”
  - Policy Response:
    - Follow through with SOEs reform plans and accelerate other structural reforms as soon as the epidemic subsides, to improve the business environment, reduce the State’s role in productive activities and enhance growth potential.

*Source: Annex I. Risk Assessment Matrix (as provided).*

### 9.      Adaptation will require ecological and sustainable use of water resources, as well as

### 1cpvea2024001 - 9.      Adaptation will require ecological and sustainable use of water resources, as well as

### Adaptation and service provision: tariffs, cost recovery, and efficiency
- Operators in the electricity and water sectors need to be compensated for the cost-of-service provision either:
  - through the tariff, which might require increasing electricity and/or water tariffs, or
  - through a combination of the tariff and a government transfer from the budget in case the government regulates the tariff (e.g., by providing a social tariff).
- Putting the sector on a sound economic footing and allowing operators to run under commercial-like terms can:
  - enhance efficiency,
  - create transparency, and
  - foster competition.
- Energy-related initiatives emphasize the power and transport sectors and include:
  - unbundling of the state-owned enterprise ELECTRA,
  - diminishing energy intensity and fostering energy efficiency,
  - increasing renewable energy (RE) deployment,
  - lowering the carbon intensity of mobility,
  - shifting towards responsible tourism and circular economy, and
  - fostering the natural sink function of ecosystems.

### Social protection and compensating vulnerable households
- Adverse implications of adaptation and mitigation reforms on the vulnerable or poor should be compensated through targeted transfers from the social safety net.
- Recommendations to strengthen social safety net reliability:
  - expand the social registry towards universal coverage.
- Fiscal design notes:
  - The cost to the government of introducing higher tariffs and compensating the vulnerable and poor could be neutral, while improving the situation of compensated households.
  - Compensation measures can be designed to both offset impacts on the vulnerable and provide extra revenues to the government.
- A careful reform design and a well-designed communication strategy are critical to ensure benefits and avoid social and political opposition.

### Investment needs and priority infrastructure for resilience
- Total estimated investment requirement for adaptation and mitigation (including energy and water) over the next decade:
  - about USD 2 billion of public and private investment.
  - This amounts to almost 6.1 percent of GDP a year, compared to a projected annual public investment budget of about 3.8 percent of GDP.
- For the energy sector, investment priorities include:
  - wind and solar capacity,
  - energy storage solutions and grid reinforcement,
  - e-mobility, and
  - energy efficiency measures.
- Constraints in electricity infrastructure:
  - limited capacity to incorporate RE, requiring maintenance of significant thermal capacity to cover demand when RE is not available.
- For the water and sanitation sector, priority investments include:
  - sustainable energy for desalination and distribution of water intended for human consumption and for irrigation,
  - network infrastructure,
  - desalination capacity,
  - capacity for the treatment and recovery of wastewater.
- The water sector infrastructure is partly outdated and worn down, causing substantial technical losses and making service provision costly and inefficient.
- To implement required actions while maintaining debt sustainability, additional concessional resources are needed for public investment, as well as increased private investment.
- The RSF aims to help by providing funding and setting groundwork for additional, climate sensitive, investment.

### Climate objectives and targets
- Cabo Verde’s climate goals and plans:
  - Climate action is a key part of the PEDS II priorities/pillars.
  - The NDC and the NAP emphasize resilient infrastructure in six areas: i) water; ii) agriculture; iii) oceans and coastal zones; iv) transport; v) disaster risk reduction; and vi) health.
- Emissions targets:
  - Cabo Verde aims to reduce domestic GHG emissions by 18 percent unconditional (24 percent conditional) compared to the 2019 Business-as-Usual (BAU) scenario by 2030.
  - Cabo Verde aims to achieve net-zero emissions by 2050.

### Governance, coordination, and institutional gaps
- Implementation and monitoring are the critical issues despite high-level strategies (NDC, NAP, PEDS II).
- Coordination weaknesses:
  - overall coordination of climate change related policies and disaster risk management should be improved;
  - central government coordination is weak and lacks a strategic leader for adaptation or mitigation investments.
- Sector planning issues:
  - energy and water sectors are responsible for defining detailed objectives and policy measures in their respective plans, but intersectoral coordination remains a significant challenge.
- Information and capacity gaps:
  - awareness of climate change implications across government entities and capacity for assessing consequences is limited;
  - work has started on closing information gaps (climate scenarios, hazard vulnerability mapping) but is at an early stage.
- Recommendation:
  - A high-level public institution should provide strong leadership, cross-government coordination, and promote awareness of climate change implications.

### Public investment management, PPPs, and fiscal resilience
- C-PIMA findings:
  - climate change considerations are not adequately integrated into the public investment planning process;
  - awareness of climate-related risks in fiscal planning needs improvement.
- World Bank DPF alignment:
  - DPF loan conditions support improved Public Investment Management (PIM); RSF will complement to apply better risk analysis and investment planning to PPPs.
  - DPF foresees development and approval of a PIM legal framework regulating the whole capital project cycle and including climate considerations.
  - DPF includes conditions for inclusion of climate and disaster risk assessments in preparing public investment projects and climate budget tagging.
- Fiscal risks and planning:
  - An institutional framework for fiscal risks assessment and analysis has been put in place.
  - The 2023 Fiscal Risks Statement (Declaração dos Riscos Orçamentais) identifies disaster risks such as rainfall, flooding, and drought, and the authorities plan to improve the analysis by conducting quantitative assessments of risks and assessing long-term fiscal sustainability under different climate change scenarios.
- PPPs and private investment:
  - PPP capital stock in Cabo Verde stood at 3 percent of GDP in 2019, compared to Mauritius (3.3 percent of GDP) and South Africa (4.6 percent of GDP).
  - The national PPP legal framework does not include climate-related aspects; authorities plan to amend policy and regulatory framework to include climate requirements throughout the PPP project cycle, including comprehensive insurance to distribute contingent liability burdens related to natural disasters.
  - Key gaps: private sector involvement in climate considerations has been weak; investment project appraisal and selection practices do not exist; ex-post reviews or external audits of projects on climate outcomes are not conducted.

### Climate finance instruments, pipeline, and mobilization strategy
- Financing needs and current instruments:
  - Financing adaptation and mitigation actions estimated at around USD 2 billion over the next decade, half for mitigation and half for adaptation.
  - Existing instruments include:
    - a dedicated environmental fund generating about USD 7 million per year (mainly from taxes on plastics);
    - a Sovereign Emergency Fund (Fundo Soberano de Emergência or FSE) for restoration and reconstruction of public infrastructure following disasters;
    - Cabo Verde launched its first blue bond on the Blu-X sustainable finance platform in January 2023; this is the first Initial Public Offering (IPO) listed on Blu-X and the bond could generate $3.5 million in private finance.
  - Authorities are exploring establishment of a new Climate and Nature Fund with World Bank technical assistance.
- Gaps and weaknesses:
  - climate financing gap remains large and contributes to slow implementation of climate initiatives;
  - choice of financial tools appears based more on opportunities than on robust cost-effectiveness assessment;
  - government does not have a pipeline of appraised capital projects; most projects included in the Programa de Investimento Público (PIP) are externally funded and included as a result of negotiations with development partners rather than explicit appraisal and selection criteria.
- Planned action:
  - Authorities plan to adopt a national climate finance mobilization strategy to develop a robust pipeline of climate investment projects.

### Catalyzing private funding and international support
- Potential to catalyze private finance:
  - Improving management and financial performance of operators in energy and water, and developing a list of bankable projects, can catalyze additional financing.
  - Better clarity on climate risks using scenarios and vulnerability mapping can lower risk premiums and facilitate private investment.
- Bilateral support:
  - Portugal: a recent debt-for-financing swap agreement will provide seed money for the Climate and Nature Fund and allow financing of climate projects (procurement restricted to Portuguese firms).
  - Luxembourg: priority topics include access to water and sanitation and to electricity, with emphasis on quality of access and RE; support is large, multiannual, all grant-based, and unrestricted in use.
  - Saudi Arabia: financing a project on water management through BADEA and the Saudi Development Fund.
- Multilateral support:
  - World Bank: preparing a DPF focused on strengthening PIM capacity and providing technical assistance in unbundling the electricity utility; has started Country Climate and Development Report (CCDR) for Cabo Verde; RSF work coordinated with WB team.
  - AfDB and JICA: previously worked on electrification and could reengage if overall risk of debt distress is lowered to moderate.
  - Latest electrification technology has enabled significant reductions in technical losses.

*Source: Cabo Verde IMF country report chapter (content unit 1cpvea2024001).*

### Annex IV. Debt Decomposition and Capacity to Repay

### Annex IV. Debt Decomposition and Capacity to Repay

### Debt decomposition (key figures from Table 1: Cabo Verde: Decomposition of Public Debt and Debt Service by Creditor, 2022-24)
- Total debt (In US$): 2855.4 (2022)
- Percent total debt: 100.0 (2022)
- Debt stock (Percent GDP): 127.1 (2022)
- Debt service (In US$): 195.0 (2022); 250.9 (2023); 254.7 (2024)
- Debt service (Percent GDP): 8.7 (2022); 9.7 (2023); 9.2 (2024)

- External debt (In US$): 2048.0 (2022); share of total debt: 71.7 (2022)
- External debt (Percent GDP): 91.2 (2022)
- External debt service (In US$): 98.3 (2022); 102.3 (2023); 108.3 (2024)
- External debt service (Percent GDP): 4.4 (2022); 4.0 (2023); 3.9 (2024)

- Multilateral creditors (In US$): 1115.6 (2022); share of total debt: 39.1; Percent GDP: 49.7 (2022)
  - IMF (In US$): 65.4 (2022); share of total debt: 2.3; Percent GDP: 2.9 (2022)
  - World Bank (In US$): 541.3 (2022); share of total debt: 19.0; Percent GDP: 24.1 (2022)
  - African Development Bank Fund (In US$): 279.0 (2022); share of total debt: 9.8; Percent GDP: 12.4 (2022)
  - European Investment Bank (incl. EEC) (In US$): 32.1 (2022); share of total debt: 1.1; Percent GDP: 1.4 (2022)
  - Other Multilaterals (In US$): 202.8 (2022); share of total debt: 7.1; Percent GDP: 9.0 (2022)
    - BADEA (In US$): 39.9 (2022); share of total debt: 1.4; Percent GDP: 1.8 (2022)
    - CEDEAO (In US$): 7.9 (2022); share of total debt: 0.3; Percent GDP: 0.4 (2022)
    - FAD (In US$): 102.7 (2022); share of total debt: 3.6; Percent GDP: 4.6 (2022)

- Bilateral creditors (In US$): 399.5 (2022); share of total debt: 14.0; Percent GDP: 17.8 (2022)
  - Paris Club (In US$): 202.5 (2022); share of total debt: 7.1; Percent GDP: 9.0 (2022)
    - France (In US$): 52.0 (2022); share of total debt: 1.8; Percent GDP: 2.3 (2022)
    - Japan (In US$): 73.2 (2022); share of total debt: 2.6; Percent GDP: 3.3 (2022)
    - Other (Spa, Belg, Aus, Swed) (In US$): 72.6 (2022); share of total debt: 2.5; Percent GDP: 3.2 (2022)
  - Non-Paris Club (In US$): 197.0 (2022); share of total debt: 6.9; Percent GDP: 8.8 (2022)
    - Portugal (In US$): 154.5 (2022); share of total debt: 5.4; Percent GDP: 6.9 (2022)
    - China (In US$): 29.1 (2022); share of total debt: 1.0; Percent GDP: 1.3 (2022)
    - Kuwait (In US$): 13.4 (2022); share of total debt: 0.5; Percent GDP: 0.6 (2022)

- Commercial creditors (In US$): 411.4 (2022); share of total debt: 14.4; Percent GDP: 18.3 (2022)
  - BPI (commercial) (In US$): 0.0 (2022) contribution to stock; debt service (In US$): 10.6 (2022); 6.0 (2023); 5.9 (2024)
  - Caixa Geral Déposito (CGD) (In US$): 407.7 (2022); share of total debt: 14.3; Percent GDP: 18.1 (2022)
    - CGD debt service (In US$): 29.7 (2022); 32.7 (2023); 32.4 (2024)

- Domestic debt (In US$): 870.7 (2022); share of total debt: 30.5; Percent GDP: 38.8 (2022)
  - T-Bills (In US$): 26.2 (2022); share of total debt: 0.9; Percent GDP: 1.2 (2022)
  - Bonds (In US$): 838.0 (2022); share of total debt: 29.3; Percent GDP: 37.3 (2022)
  - Loans (In US$): 0.0 (2022)

- Memo items:
  - Contingent liabilities (In US$): 202.0 (2022); share of total debt: 7.1; Percent GDP: 9.0 (2022)
  - Collateralized debt (In US$): 0.0 (2022)
  - Public guarantees (In US$): 202.0 (2022); share of total debt: 7.1; Percent GDP: 9.0 (2022)

Notes from table:
- 1/ Debt coverage is the same as the DSA.
- 2/ Multilateral creditors are institutions with more than one official shareholder.
- 3/ Definition of collateralized debt provided.
- 4/ Contingent liabilities include other one-off guarantees not included in publicly guaranteed debt.

### Capacity to Repay indicators (Figure 1 summary)
- Figure compares Cabo Verde CtR indicators to UCT arrangements for PRGT countries across multiple horizons (T to T+20).
- Indicators referenced in the figure include:
  - Percent of gross international reserves
  - Percent of GDP
  - Percent of PPG external debt
  - Percent of revenue excl. grants
  - Percent of exports of goods and services
  - Percent of PPG external debt service
- Red lines/bars indicate CtR indicator for the arrangement of interest. The comparator series reflects all UCT arrangements (including blends) approved for PRGT countries between 2012 and 2022.
- Notes clarify treatment of Fund credit outstanding and debt service obligations to the Fund, and how blenders/RST cases are represented.

### Program context, requests, and policy commitments (from Letter of Intent and MEFP)
- IMF requests and program actions:
  - Requesting a disbursement equivalent to SDR 4.5 million (or 19 percent of our quota).
  - Request to modify the PC on the PV of new external debt for end-December 2023.
  - Request to clarify definition of deposits under other net liabilities in the TMU (from a stock to a flow).
  - Request to modify the PC on other net liabilities in December 2023 and June 2024 to reflect delay in 2023 privatization receipts.
  - Government requests access to the Resilience and Sustainability Facility (RSF) for an amount of SDR 23.7 million (100 percent of quota) to implement reform measures (RMs) under five pillars:
    - (i) strengthening climate change policy governance;
    - (ii) improving physical and fiscal resilience;
    - (iii) strengthening mitigation and resilience through energy efficiency and transition;
    - (iv) promoting adaptation by ensuring ecological and economic sustainability of water resources and planning for long-run climate impacts;
    - (v) financial sector resilience to climate change.

- Program governance and transparency commitments:
  - Disbursements subject to observance of performance criteria and structural benchmarks shown in the MEFP.
  - Government will provide Fund staff with all data and information necessary to assess policies and measures as per the TMU.
  - During RSF implementation, government will consult IMF in advance of any revisions to RMs and will provide information on progress linked to the disbursement schedule.
  - Government authorizes IMF to publish the letter and attachments, and will post these documents including Portuguese versions on the Government’s official webpage.

### Macroeconomic developments and outlook (key projections and recent performance)
- Growth and activity:
  - Projected growth: 4.5 percent (2023); projected growth: 4.7 percent (2024)
  - Real annual GDP growth expected to average 4.6 percent during 2024–28.

- External sector and reserves:
  - Gross international reserves remained stable at around €626 million through end-June 2023.
  - Reserves expected to reach 6.1 months of prospective imports by end-2023.
  - Current account deficit expected to widen to about 5.5 percent of GDP in 2023.

- Inflation and money:
  - Inflation projected at 2 percent at end-December 2024.
  - Monetary policy: policy rate raised from 0.25 to 1.0 percent in early May 2023; raised to 1.25 percent on October 27, 2023.
  - At end-September 2023: M2 grew at 5.2 percent (y/y); total deposits grew by 5.5 percent (y/y); credit to the economy grew by 2.9 percent (y/y).

- Fiscal performance:
  - Tax revenue growth: 22.6 percent (1H2023/1H2022).
  - Primary expenditure growth: 6.1 percent (1H2023/1H2022).
  - Primary balance (1H2023): surplus of CVE 2,759 million; program target was CVE -4,141 million.
  - Fiscal consolidation objectives:
    - Primary fiscal balance: from a deficit of 1.9 percent of GDP in 2022 to close to zero by end of program and surplus close to 1 percent of GDP in 2028.
    - Overall fiscal deficit: from 4.1 percent of GDP in 2022 to around 0.7 percent of GDP (small deficit) over the same period.
    - Debt-to-GDP ratio: projected decline from 127.1 percent in 2022 to 93.9 percent in 2028.

- Risks and vulnerabilities:
  - Downside risks: weakened demand in major tourism markets, external price shocks, fiscal risks from SOE reforms, pressures on the budget, climate change (droughts).
  - Country described as one of the world's most vulnerable to climate change due to rainfed agriculture and increased frequency/severity of droughts and floods.
  - High risk of overall debt distress remains a concern; concessional financing emphasized to limit debt servicing cost.

### Policy priorities and reforms under the ECF and RSF
- Main program objectives (2023–25):
  - (i) Strengthen public finances to increase fiscal space for investment in catalytic sectors and promote social inclusion.
  - (ii) Reduce fiscal risks from public enterprises.
  - (iii) Modernize the monetary policy framework and strengthen the financial system.
  - (iv) Raise growth potential and build resilience to shocks from climate-related change.

- Structural and fiscal measures highlighted:
  - Sustain ongoing tax administration reforms, improved compliance, and measures to reduce tax expenditures (to be included in the 2025 budget proposal).
  - Acceleration of SOE reforms to reduce fiscal risks.
  - Pursue capital spending to accelerate investments in climate action while balancing fiscal consolidation.
  - Seek support from partners, including the Fund, to access green financing.

*Source: Annex IV. Debt Decomposition and Capacity to Repay (content unit: 1cpvea2024001)*

### 9.      The 2023 fiscal outcome is likely to overperform the budget and the program targets

### 9.      The 2023 fiscal outcome is likely to overperform the budget and the program targets

### 2023 fiscal outturn and near-term projections
- Total tax receipts increased by 19.3 percent (data up end-August of 2023) and are projected above the indicative target set under the program.
- Revenue growth drivers:
  - Continued improvements in the tourism sector.
  - Revenue measures implemented under the program.
  - Receipt of the property income associated with the airport concession in August.
- Expenditure stance:
  - Expenditures remained contained in line with program objectives.
  - Capital expenditure, budgeted at 4.8 percent of GDP, progressed more slowly than planned.
- Fiscal balance outcome:
  - Expected primary deficit of 1.1 percent of GDP for 2023.

### Financing needs and composition for 2023
- Financing needs projected at 3.4 percent of GDP (down from 4 percent at the first review).
- Domestic financing projected at -0.6 percent of GDP and expected to remain below the legal rule of 3 percent of GDP.
- External financing composition (major sources and shares):
  - World Bank: 2.4 percent of GDP.
  - African Development Bank: 0.8 percent of GDP.
  - Resources provided under the ECF program and other official creditors (partially concessional and concessional loans).

### 2024 draft budget and medium-term envelope
- Draft 2024 budget submitted to parliament is in line with the ECF-supported program.
- Budget assumptions and differences:
  - Draft budget assumes higher tax collection of CVE 1.3 billion than IMF staff’s projections.
  - Budgeted primary expenditures reverse the 2023 increase in energy subsidies and include an additional CVE 1 billion capital spending relative to the last review.
  - Draft budget primary balance is CVE 1 billion higher than previous projections.
- Primary balance comparisons:
  - Primary deficit under the draft budget: 0.7 percent of GDP.
  - ECF program forecasts a primary deficit: 1.1 percent of GDP.
- Financing of higher investments over 2024–2025:
  - Combination of higher grants, concession fees, tax revenue and a slight increase in the primary deficit.
  - Additional income allows higher investment over 2024 and 2025 before capital spending returns to the baseline path in 2026 (implying more adjustment in 2026 than under the 2nd review).
- SOE reforms expected to reduce capitalization and on-lending starting in 2025, helping improve the fiscal position.

### Domestic revenue mobilization measures
- Planned measures (with IMF TA support):
  - Develop and publish an action plan to reduce tax expenditures, including published estimates of annual tax expenditures in the budget.
  - Undertake phased implementation of the ECOWAS tariff, to increase revenue by 1 percent of GDP (SB end-September 2024).
- Revenue administration improvements expected to yield additional revenues mainly through:
  - Collection of tax arrears.
  - Heightened supervision focusing on VAT, personal and corporate income tax arrears.
  - Complete digitalization of all revenue administration and collection processes to achieve significant efficiency gains.

### Expenditure priorities and medium-term fiscal strategy
- Near-term:
  - Wages projected to grow slightly above inflation to partially recover lost purchasing power.
  - Increased spending on social programs and subsidies to shield the vulnerable from higher basic food costs.
- Medium-term:
  - Continue seeking 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 with strictly prioritized capital expenditure.
  - Review social welfare programs to ensure adequate coverage amid rising prices and climate risks.
- Recognition that additional policy measures will be required to achieve medium-term fiscal objectives, including continued SOE reforms.

### Public investment management reforms
- Commitment to improve efficiency of the public investment framework; four near- to medium-term steps in line with IMF TA (C-PIMA):
  - (i) Redefine existing thresholds to reduce number of projects qualifying for detailed appraisal in line with capacity.
  - (ii) Develop and implement an enhanced pre-screening system (pre-screening+), a single-entry point for all project ideas.
  - (iii) Develop and implement multi-criteria analysis (MCA) techniques and matrices for prioritization and selection.
  - (iv) Develop and implement a pre-implementation checklist.

### Cash flow management and fiscal transparency
- Improvements achieved:
  - Development of a Treasury Single Account (TSA) and adoption of SIGOF.
- Further steps:
  - Bring all central government accounts into the TSA.
  - Institute a cash coordination committee to systematically review forecasts.
- Broader fiscal coverage and reporting:
  - Prepare accounts at the general government level and publish annual budget execution reports for the general government (SB end-September 2023).
  - Broaden fiscal risk analysis and reporting to include PPPs (proposed new SB end-September 2024).

### Debt management and fiscal risk reduction
- Ongoing initiatives:
  - Agreement in principle with Portugal to explore debt for climate swap initiatives.
  - Updated debt legislation in line with the 2018 review to implement the debt management strategy and internal DSA.
  - Planned FAD training for Ministry of Finance officials during the first half of 2024 to support preparation of the 2025 budget guidelines.
  - Review of laws regulating guarantees, including a guarantees law providing for a fund financed by beneficiaries of guarantees.

### Reducing fiscal risks from SOEs and improving SOE financial management
- Monitoring and transparency measures:
  - Quarterly fiscal risk assessments using IMF SOE health check tools and quarterly monitoring report of SOEs’ budget execution prepared since 2022.
  - Launch of the SOE Manager platform in October 2023 providing real-time financial data for the majority of SOEs.
  - Publish quarterly consolidated transaction and financial flows between government and SOEs on individual and aggregate basis.
  - Improved annual SOEs’ report to include execution vs initial budget, performance vs medium-term plans, and data on government relations (SB end-July 2023).
  - Publish forward-looking targets agreed between the Ministry of Finance and Business Development and the six largest SOEs on improving financial performance and reducing need for central government support (SB end-June 2024).
- Ongoing analyses:
  - Analyzing non-performing loans from the BCV study on loan losses and provisions at the end of the credit moratorium and implications for government guarantees and related fiscal risks.

### Cabo Verde Airlines (TACV) restructuring
- Reorganization and privatization intent:
  - TACV started operations with one aircraft in 2022; a second aircraft started operating in August of 2023.
  - Interim and medium-term plan to increase aircraft and flights to Europe, USA, Brazil and Africa to achieve breakeven.
- Government financing support:
  - Financing to cover projected gap of €30 million (about 1.6 percent of GDP) over a period of three years.
- Next steps:
  - Seek best restructuring options based on a business plan covering at least five years.

### Monetary policy framework, reserves, and transmission
- Exchange rate regime:
  - Conventional fixed peg exchange regime continues as a stable anchor for monetary policy.
- International reserves:
  - Projected increase of 100 million euros in 2023, reaching a level equivalent to 6.1 months of imports of goods and services.
  - Key reserve drivers: tourism growth, grants, ECF disbursements, remittances.
  - Medium-term reserve targeting in the range of 5½–6 months of prospective imports.
- Policy actions:
  - Tightened rates in October 2023 to narrow differential with the ECB and readiness to take further action if reserve pressures appear.
  - Continued focus on safeguarding the peg and strengthening monetary policy transmission.

### Money market development, analytical capacity, and emergency liquidity
- Money market and instruments:
  - Pre-announced schedule for auctions of Monetary Intervention Securities (TIMs) and Monetary Regularization Securities (TRMs).
- Analytical improvements:
  - Introduction of composite indicators of economic activity and strengthened near-term forecasting (SB end-June 2023); index to be updated after rebased GDP series.
- Emergency liquidity:
  - Develop a framework to guide provision of emergency liquidity assistance; working on remaining legal framework.
- Fintech and digital economy:
  - BCV and Ministry of Finance sought World Bank TA for a digital economy assessment and national fintech strategy.

### Banking sector resilience and supervision
- Post-moratorium readiness:
  - Indicators show banking sector well placed to withstand end of credit moratorium.
  - Study of loan losses and provisions at expiration of the credit moratorium covering majority of banking sector completed and expanded.
- Supervisory and resolution measures:
  - Encourage prudent loan restructuring, provide guidance on prudential treatment of moratoria and NPL management.
  - Develop common framework for bank resolution and detailed reporting templates for restructured/rescheduled loans.
  - Internal analysis of a common framework for resolution of crisis-related NPLs; further work in conjunction with World Bank FSAP.

### AML/CFT, virtual assets, and regulatory improvements
- AML/CFT progress and plans:
  - Establishment of a national AML/CFT committee.
  - Exit from the EU Grey List in 2020 helped preserve correspondent banking relationships.
  - Approval in 2023 of the National Strategy for 2023-2027 with seven major priority objectives.
- Virtual assets and digital banks:
  - Bill approved by parliament in June [of this year] regulating services with virtual assets and assigning BCV responsibility for regulation and supervision to prevent ML/TF for entities carrying out virtual asset activities.
  - Law stipulates creation of digital banks depends on BCV authorization and subjects them to same duties as conventional banks.
- DNFBPs:
  - Capacity-building process for DNFBPs remains ongoing.

### Financial sector development and statistics
- Regulatory and supervisory strengthening aims to deepen financial sector and support inclusive, sustainable growth while preserving stability.
- 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 modernization:
  - Submit legislation amending the BCV Organic Law to strengthen BCV’s decision-making structure, autonomy, accountability and transparency (Proposed new SB end-July 2024), supported by IMF TA.
  - Accelerate work towards adoption of Basel II Pillar 1; BCP Self-Assessment evaluation on Basel principles planned for the last part of 2023.
- Statistical improvements:
  - Eliminated discrepancies between BCV domestic publications and data sent to the IMF by adopting IMF’s MFSMCG-based methodology.
  - Continue enhancements to data on credit by economic activity using INE’s economic activity classification.

### Structural reforms, diversification, and business environment
- Five-year development strategy priority areas:
  - (i) Completing SOE reforms.
  - (ii) Facilitating access to finance.
  - (iii) Improving the business environment, especially for SMEs.
- Diversification channels:
  - Within tourism: move towards more integrated resort projects with top hotel brands.
  - Alternative sectors: blue economy, digital economy, industry integrated into regional/global value chains, modernization of agriculture using desalinated water.
- Business climate improvements:
  - Ease legal procedures for businesses by improving linkages with judicial processes.
  - Focus on land titling issues and digitalization of relevant information to reduce delays.

### Social protection and poverty reduction
- Social spending and targeting:
  - Social spending aided by social protection fund financed by the tourism tax and customs revenue for small parcels.
  - Strengthen social safety nets through improved targeting.
- Partnerships and objectives:
  - Work with external partners (World Bank and African Development Bank) to improve targeting of social programs.
  - Sign a pact for poverty reduction with the goal of eliminating extreme poverty by 2026.
  - Reform national social security system to align with best practices and evolving needs.

*Source: 1cpvea2024001 - 9.      The 2023 fiscal outcome is likely to overperform the budget and the program targets*

### 31.      In that regard, policies under the program will help safeguard spending on social

### 1cpvea2024001 - 31.      In that regard, policies under the program will help safeguard spending on social

### Social protection and productive inclusion
- Policies under the program will help safeguard spending on social safety nets and help increase capacity to expand these interventions.
- Important investments made in delivery systems for social protection:
  - Social registry.
  - RSI cash transfer program.
- Program priorities and expected effects:
  - Support for the most vulnerable and helping lift households out of poverty are key objectives.
  - Productive inclusion program guarantees empowerment for the most vulnerable families and cash transfers to some of the most vulnerable families in Cabo Verde.
  - Cash transfers are described as an important and efficient investment in people that:
    - Contribute towards strengthening resilience.
    - Enhance human capital by ensuring food security.
    - Enable expenses related to education and health for children in beneficiary households.
    - Provide training for inclusion in the job market.

### Climate change challenges and strategic objectives
- Climate change amplifies development challenges through scarcity of natural resources (water and arable land) and reliance on imported carbon-based energy.
- Stated climate commitments:
  - Under the NDC, commit to reduce GHG emissions by 2030 by 18 percent (24 percent conditional) compared to BAU.
  - Aim to achieve net zero by 2050.
- Strategic aims:
  - Enable efficient and climate-aware management of public resources.
  - Support climate-resilient private sector–led development, including climate-aware investment in tourism and renewable energies.

### Role of the RSF (Resilience and Sustainability Facility)
- The RSF will support macro-critical climate reforms and catalyze private finance for climate adaptation and transition in line with PEDS II and NDC.
- RSF focus areas:
  - (i) Strengthening climate change policy governance.
  - (ii) Improving physical and fiscal resilience.
  - (iii) Strengthening mitigation and resilience through energy efficiency and transition.
  - (iv) Promoting adaptation by ensuring ecological and economic sustainability of water resources and planning for long-run climate impacts.
  - (v) Financial sector resilience to climate change.
- RSF financing effects:
  - Provide budget support and replace more expensive financing to create policy space for climate-related investments.
- RSF alignment and inputs:
  - Supports PEDS II and NDC.
  - Reflects recommendations from the C-PIMA and the Climate Policy Diagnostics.
  - Informed by the WB’s Country Economic Memorandum and forthcoming DPF.
  - Each reform area has reform measures (RMs) with specified target dates.

### Reform Area 1 — Strengthen Governance of Climate Change Policy
- Objective: improve coordination of climate change related policies and disaster risk management.
- Key measure:
  - Coordination mechanism at the level of the Heads of Government (RM1, by end-April 2024).
- Expected outcomes:
  - Promote awareness of climate change implications.
  - Ensure cross-sectoral consistency of climate-related policies.
  - Provide strategic leadership for coordination of disaster risk management (DRM).
- Noted capacity steps already taken:
  - Sectoral planning and technical capacity building within the Ministry of Agriculture and Environment and the National Civil Protection and Fire Service.

### Reform Area 2 — Improve Fiscal and Physical Resilience to Climate Change
- Fiscal risk management and budgeting:
  - Developing a methodology for tagging climate-related expenditure in budget and financial reporting (with Luxembourg support).
  - Creation in 2022 of a high-level fiscal risk coordination committee tasked with managing fiscal risks associated with climate and disaster risk; plan to revise composition to integrate critical national counterparts.
  - 2023 Fiscal Risks Statement (RSF) identifies main risks: macroeconomic risk, risk associated with the state's business sector, and risk associated with public debt.
  - Quantitative analysis of fiscal risks generated by climate change to be conducted and published in the RSF (RM2, by end-September 2024, and submitted with the budget proposal on October 1, 2024).
  - Commitment to incorporate climate risks into MTFFs, MTDS, and DSA.
- Public investment management and project appraisal:
  - Progress on climate change policy framework, spatial planning, coordination with municipalities, and disaster risk financing planning.
  - Revised 2012 Building Code to improve energy efficiency in public buildings.
  - Commitment to issue a PIM legal framework incorporating green and resilient considerations across the capital project cycle as part of planned engagement with the WB under the new DPF.
  - Appraisal screening methodology developed with AFRITAC West 2 support; to be updated to handle exposure and resilience of public works to natural disasters.
  - Resolve to amend existing PPP legal framework to ensure climate requirements in PPP agreements and develop a manual integrating these requirements (RM3, by the end-April 2024).
  - Plan to georeference public assets and adopt proactive capital maintenance approaches.

### Reform Area 3 — Strengthen Mitigation and Resilience Through Energy Efficiency and Transition
- Context and challenges:
  - More than 80 percent of electricity generation relies on imported fossil fuels.
  - Majority of GHG emissions come from the energy sector.
  - Reliance on fossil fuels has fiscal implications as the state shields households from pass-through costs.
- Opportunities and needs:
  - Cabo Verde has vast potential from renewable energy sources (RES).
  - Energy transition will:
    - Contribute to emission reduction and attainment of NDC objectives.
    - Allow cost-efficient response to growing energy demand (including desalination-reliant water sector).
    - Yield favorable long-term impacts on the balance of payments as fossil fuel imports decline.
  - Requirements for transition:
    - Substantial public investment in electricity grid infrastructure to build capacity for higher RES shares.
    - Market conditions to encourage private investment in energy production.
- RSF support and reform measure:
  - Ensure tariff reflects full cost of service provision to support energy efficiency.
  - Ensure availability of financial resources to facilitate network infrastructure upgrades.
  - Promote technical stability and financial sustainability of offtake to develop appropriate market conditions (RM5, by end-April 2025).
  - Support from the WB to unbundle the energy sector.
  - Request for FAD CD support on designing tariff reforms including distributional impact assessment.

### Reform Area 4 — Promote Adaptation: Water Resources and Long-run Climate Planning
- Water sector challenges:
  - Water shortages aggravated by climate-related threats.
  - Technical and commercial losses amount on average to about 50 percent of the total fresh water entering the system.
  - Several publicly owned water operators run operational losses and/or have negative equity.
- RSF-supported actions:
  - Improve efficiency of water use and provision and expand water sourcing.
  - Promote efficient price signals to encourage efficient water use.
  - Create preconditions for funding critical investments to enhance long-term operational and financial sustainability of the water sector (RM6, by end-April 2025).
  - Strengthen the social safety net (SSN) to allow efficient provision of support in context of climate-related shocks and potential adverse implications from energy transition on poor and vulnerable (RM7, by end-November 2024).
  - WB assistance to strengthen the SSN; request FAD CD support on designing tariff reforms including distributional impact assessment.
- Information and planning:
  - Develop and share climate scenarios relevant to Cabo Verde and hazard vulnerability maps consistent with the climate scenarios (RM8, by end-November 2024).
  - Implement early warning systems to identify risks early and inform population to protect lives and livelihoods.

### Reform Area 5 — Financial Sector Resilience to Climate Change
- Objective: steer private finance towards a low-carbon climate-resilient economy and strengthen financial sector resilience to climate-related risks.
- Key measures:
  - Adoption by the BCV of guidelines to monitor banks and disclosure of climate-related risks and opportunities (RM9, by end-November 2024).
  - Design a climate information architecture for banks (taxonomy and climate disclosures).
  - Promote climate resilience among financial institutions to unlock private sector climate financing.
- Rationale:
  - The strong role of the banking sector in Cabo Verde and tourism dependence mean climate events could escalate financial sector vulnerabilities.

*Source: IMF country document provided in the content unit.*

### 42.      The program will be closely monitored through the proposed quantitative

### 1cpvea2024001 - 42.      The program will be closely monitored through the proposed quantitative

### Program monitoring, schedule, and scope
- The program will be monitored through the proposed quantitative performance criteria, indicative targets, and structural benchmarks (Table 1 and 2).
- The Technical Memorandum of Understanding (TMU) describes the definitions and data provision requirements.
- Program review schedule:
  - Fourth program review: March 2024 (based on end-December 2023 test date).
  - Fifth program review: October 2024 (based on end June 2024 test date).
  - Sixth program review: March 2025 (based on end-December 2024 test date).
- A clarification was requested in the TMU on the definition of deposits under other net liabilities (from a stock to a flow).
- A modification was requested of the performance criterion on other net liabilities in December 2023 and June 2024 to reflect the delay in 2023 privatization receipts.
- Monitoring cadence:
  - The program will continue with monitoring on a semi-annual basis by the IMF Executive Board.
  - Under the RSF, monitoring will be done by means of the reform measures detailed in Table 3 of the MEFP.
- Climate work: “The work on climate scenarios and maps is ongoing and once the council is in place, it will officially cover the matter.”

### RSF Reform Measures Matrix — key reform measures, expected outcomes, partners, and timing
- RM1: Establish a council/body for coordinating climate change policy planning and strategy, and DRM under the Heads of Government; MAE serves as secretariate.
  - Expected outcome: Integrated and effective coordination of climate change activities; cross sectoral consistency.
  - Development partner role: LuxDev support to MAE for climate management function.
  - Timing: End-April 2024; 4th ECF Review.
- RM2: Ministry of Finance will conduct and publish quantitative analysis of fiscal risks generated by climate change in the annual Fiscal Risk Statement.
  - Expected outcome: Improve awareness of climate-related matters in fiscal planning and budgeting.
  - Development partner role: Follow up support from FADM2; World Bank has prior actions and triggers in the latest DPF supporting a stronger PIM framework aligned with C-PIMA recommendations.
  - Timing: End-September 2024; 5th ECF Review.
- RM3: Amend PPP legal framework to ensure climate requirements are reflected in PPP agreements and publish a manual integrating these requirements across the PPP lifecycle.
  - Expected outcome: Stronger PPP framework; reduced fiscal risks from PPPs; enhanced climate-sensitive public investment planning and budgeting.
  - Development partner role: FAD support.
  - Timing: End-April. 2024; 4th ECF Review.
- RM4: Scale up and systematize climate finance by (i) adopting a national climate finance mobilization strategy and (ii) developing/publishing a pipeline of appraised public capital projects as part of the budget process.
  - Expected outcome: Generate a robust pipeline of projects and scale up climate investments.
  - Development partner role: Luxembourg and follow up support from FADM2.
  - Timing: End-April 2025; 6th ECF Review.
- RM5: Support energy transition plans by (i) determining the cost-recovery rate for electricity, (ii) identifying tariff discrepancy, (iii) undertaking a distributional impact assessment, and (iv) publishing regulations establishing a methodology for adjusting electricity tariffs to the cost-recovery rate to be applied by the regulator.
  - Expected outcome: Energy efficiency, facilitation of renewable energy, financial soundness of electricity sector operator, and environment conducive to private sector investment in RES production.
  - Development partner role: FADEP support on analytical study and distributional impact – TBC; World Bank energy projects supporting unbundling the energy SOE.
  - Timing: End-April 2025; 6th ECF Review.
- RM6: For water sector sustainability, determine cost-recovery rate for water, identify tariff discrepancies, undertake distributional impact assessment, and publish regulations for adjusting water tariffs or finance infrastructure transparently from the budget.
  - Expected outcome: Sustainable use of water resources, clarify source of funding for infrastructure, ensure financial soundness of water sector operators, encourage private investment in water and sanitation.
  - Development partner role: FAD support for tariff review and distributional impact – TBC; LuxDev providing support in the water sector.
  - Timing: TBC. End-April 2025; 6th ECF Review.
- RM7: Expand the Unique Social Registry (USR) to 100 percent coverage of poor and vulnerable households and offer inclusion to 100 percent of households in climate vulnerable areas.
  - Expected outcome: Strengthen the social safety net to efficiently support vulnerable and poor in adverse climate events and through climate transition.
  - Development partner role: World Bank.
  - Timing: End-Nov. 2024; 5th ECF Review.
- RM8: INGT or new unit/council for CC management and DRM will develop and disseminate natural disaster risk and vulnerability maps; amend land use planning regulation and construction code requirements to consider disaster risks and vulnerabilities.
  - Expected outcome: Investment decisions resilient to climate change impacts such as sea level rise, flooding, and landslides.
  - Timing: End-Nov. 2024; 5th ECF Review.
- RM9: BCV will develop a climate information architecture for banks: (1) adopt a climate change adaptation and mitigation taxonomy, and (2) publish climate risk/opportunities disclosure guidelines; banks to submit internal roadmaps within six months from effective date, followed by progress reports every six months.
  - Expected outcome: Transparency on impact of climate change and disaster risks in the financial sector.
  - IMF CD input: MCM CD (TBC).
  - Timing: [TBC] End-Nov. 2024; 5th ECF Review.

### Technical Memorandum of Understanding (TMU) — key definitions, exchange rates, and reporting requirements
- 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.
  - Assets and liabilities denominated in SDRs and in foreign currencies not in USD will be converted into USD at the exchange rates reported in Table 1.
- A. Floor on the Primary Balance of the Central Government:
  - Central government definition: includes all units of budgetary central government and extrabudgetary entities; excludes local government (municipalities), social security funds and public corporations.
  - Primary balance definition: total tax and non-tax revenues and grants minus primary expenditure; measured as cumulative flow over the calendar year.
  - Recording conventions:
    - Revenues are recorded when funds transferred to a government revenue account; tax revenues are net of tax refunds.
    - Central government primary expenditure is recorded on a cash basis and covers recurrent and capital expenditure.
  - Adjustment: The floor of the primary balance will be adjusted upward (downward) by the surplus (shortfall) in disbursements of the grants to the baseline projection.
  - Reporting: Data provided monthly by the Directorate National of Planning (DNP) of the Ministry of Finance with a lag of no more than six weeks from the end of-period.
- B. Cumulative Floor on Central Government Tax Revenue:
  - Tax revenues exclude asset sales, grants, and non-tax revenues.
  - Revenue target is calculated as cumulative flow from the beginning of the calendar year.
  - Reporting: Data provided monthly by the DNP with a lag of no more than six weeks from the end of-period.
- C. Floor on Net Other Liabilities:
  - Net Other Liabilities defined as the sum of central government deposits, loans to state-owned enterprises (SOEs) and municipalities (onlending), capitalization, other assets, and privatization proceeds.
  - Deposits capture changes in all claims on deposit-taking corporations (including the central bank); onlending defined as loans contracted by central government and onlent to SOEs; net onlending = disbursements minus repayments by SOEs.
  - Capitalization defined as capital injection or equity participation; other assets comprise other accounts receivable/payable; privatization proceeds refers to income from sale of central government assets to private sector.
  - Adjustment: The floor of net other liabilities will be adjusted downward (upward) by the shortfall (surplus) in privatization proceeds relative to program projections.
  - Reporting: Data provided quarterly by the DNP with a lag of no more than six weeks from the end of-period.
- D. Ceiling on Net Domestic Financing (NDF) of the Central Government:
  - NDF defined as (i) net position vis-à-vis the central bank and commercial banks and (ii) net issuance of securities outside the banking system.
  - NDF at end-December 2023, end-June 2024, and end-December 2024 (PCs) must be equal to or less than amounts indicated in Table 1 (of QPCs) attached to the MEFP.
  - External budgetary assistance defined as budget loans, grants and non-earmarked debt relief operations (excluding project-related loans and HIPC/MDRI relief); includes budget support from IMF, World Bank, AfDB, EU and others.
  - Adjustment mechanics:
    - If net external budgetary assistance exceeds program projections (cumulative since January 1 of the same year) at end of a quarter, the NDF ceiling will be adjusted downward.
    - If it falls short, the NDF ceiling will be adjusted upward while respecting limits established by the Budget law (including any waivers).
  - Reporting: Data provided monthly by the DNP and BCV (for the net position of the government to the banking system) with a lag of no more than six weeks from the end of-period.
- E. Non-accumulation of Domestic Payments Arrears:
  - Government will not accumulate any new domestic payments arrears.
  - Arrears monitoring: domestic payment obligation deemed in arrears if not paid within normal grace period of 60 days (30 days for government salaries and debt service) or such other period specified by budget law or contract, unless amount/timing is under good faith negotiations after verified delivery.
  - Reporting: DNP will submit quarterly a detailed table of the stock of domestic payments arrears (accumulation, payment, rescheduling, write-off) within six weeks after the end of the quarter.
- F. Ceiling on the PV of New External Concessional Debt:
  - Ceiling applies to PV of new external debt contracted or guaranteed by the public sector with original maturities of one year or more; applies to debt for which value has not yet been received, including private debt with official guarantees.
  - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies if deviations are prompted by a change in financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees); adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed.
  - External public debt definition: debt to nonresidents contracted or guaranteed by the central government; includes central government and official sector entities and SOEs guaranteed by the central government.
  - Debt definition follows Point 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 16919-(20/103), adopted October 28, 2020), including loans, suppliers’ credits, and leases; arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.

*Source: 1cpvea2024001 - Extracts from the MEFP and TMU as provided in the content unit.*

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

### 1cpvea2024001 - 20.      Under the program, ceilings on medium and long-term, as well as on short-term,

### Concessional external debt ceilings and concessionality calculation
- Ceilings on medium- and long-term, as well as on short-term, concessional external debt constitute quantitative targets.
- Coverage includes budget loans, projects and program loans, and on-lending loans to SOEs in line with the fiscal program.
- For program purpose, a debt is concessional if it includes a grant element of at least 35 percent.
- Grant element definition and calculation:
  - The grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
  - For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt.
  - The discount rate used is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).
- Exclusions and scope:
  - Debt rescheduling and debt reorganization are excluded from the limits on concessional external debt.
  - New concessional external debt excludes normal short-term (less than one year) import-related financing.
- Reporting requirement:
  - The government of Cabo Verde will consult with Fund staff before assuming any liabilities when uncertain whether the instrument falls under the quantitative target.
  - Details of all new external debt (including government guarantees), indicating terms of debt and creditors, will be provided on a quarterly basis within six weeks of the end of each quarter.

### Variable-rate debt PV calculation and program reference rates
- For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract.
- Program reference and spreads:
  - The program reference rate for the six-month USD LIBOR is 2.699 percent and will remain fixed for the duration of the program.
  - The spread of six-month Euro LIBOR over six-month USD LIBOR is -168 basis points.
  - The spread of six-month GBP LIBOR over six-month USD LIBOR is -80 basis points.
  - For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is 100 basis points.
- Benchmark substitution rule:
  - Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added.
  - Given the anticipated global transition away from LIBOR, the TMU can be updated to reflect relevant benchmark replacements (U.S. Secured Overnight Financing Rate (SOFR); U.K. Sterling Overnight Index Average (SONIA); EURIBOR; and Tokyo Overnight Average Rate (TONAR)) prior to complete phase out, once operationally feasible.
- Note on concessionality calculation: The calculation takes into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

### Non-concessional external debt ceilings and definitions
- Ceilings on medium- and long-term, as well as on short-term, non-concessional external debt constitute quantitative targets.
- The zero ceiling on non-concessional external debt is on a continuous basis.
- For program purpose, a debt is non-concessional if it includes a grant element of less than 35 percent.
- Grant element and PV are defined and calculated identically as for concessional 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.
- Exclusions and scope:
  - Debt rescheduling and debt reorganization are excluded from the limits on non-concessional external debt.
  - Quantitative target excludes borrowing from the Fund.
  - Non-concessional external debt excludes normal short-term (less than one year) import-related financing.
  - The Portuguese government’s precautionary credit line (the “Portuguese credit line”) in support of the exchange rate peg is excluded from the definition of non-concessional external debt.
- Reporting requirement:
  - The government will consult with Fund staff before assuming any liabilities when uncertain whether the instrument falls under the quantitative targets.
  - Details of all new external debt (including government guarantees), indicating terms of debt and creditors, will be provided on a quarterly basis within six weeks of the end of each quarter.

### Gross International Reserves (GIR) of the Central Bank (BCV)
- The floor on the stock of GIR of the BCV constitutes a quantitative target under the program.
- GIR definition: gross international reserves of the BCV which include assets that are readily available (i.e., liquid and marketable and free of any pledges or encumbrances), controlled by the BCV and held for meeting balance of payments needs and intervening in FX markets. They include gold, holdings of SDRs, the reserve position at the IMF, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities.
- Program floors for GIR will be adjusted downward by:
  - The cumulative upward deviations in external debt service relative to program assumptions.
  - The cumulative downward deviations in external financial assistance, and project and budget loans relative to program assumptions.
  - For purposes of calculating the adjusters, these flows will be valued at current exchange rates.
- Reporting requirement:
  - A table on the GIR prepared by the BCV will be transmitted on a monthly basis, with a maximum delay of four weeks.

### Non-accumulation of external payments arrears
- The government will not accumulate any new external payments arrears; this is a continuous target.
- Monitoring:
  - Monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations.
- Definition for program monitoring:
  - External payments arrears are the amount of external debt service due and not paid within the contractually agreed period, subject to any applicable grace period, including contractual and late interests.
  - Arrears resulting from nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded.
- Reporting requirement:
  - Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the DNP of the Ministry of Finance, within six weeks of the end of each quarter.
  - The government will inform Fund staff immediately of any accumulation of external arrears.

### Memorandum item: Floor on central government social spending
- The indicative floor applies only to expenditures incurred by the central government on plans and programs intended to have a positive impact on education, health, and social protection, excluding the wages and salaries component.
- Measurement and reporting:
  - Data measured as cumulative over the fiscal year.
  - Reported by the DNP on a quarterly basis, with a lag of no more than six weeks from the end-of-period.

### RSF Reform Measures (selected)
- RM 5 and 6: Cost recovery tariff under RM 5 and 6 should reflect the capital cost of infrastructure and the operational cost.
  - Infrastructure cost covers investment needed during the transition, maintenance and replacement based on useful life.
  - Operational cost reflects the current and target energy mix.
- RM8 climate vulnerability information requirements:
  - Maps on vulnerability to sea-level rise projection based on identified climate scenarios with full coverage of territory.
  - Climate vulnerability maps for the seven (seven out of 22) most populated and/or most climate vulnerable municipalities.
  - Maps including information on occurrence of past climate hazards with additional information on expected implications of climate change as implied by identified climate scenarios.
  - These maps will be made available online.
  - Requirements for using vulnerability map information in land use and construction planning should be reflected in the National Regulations for Territory Management and Urban Planning (Decree-Law 61/2018) or related regulations, and the Technical Building Code (Order 4/2012).

### Other data requirements and assessment of reform targets
- Trade and balance of payments data:
  - Data on exports and imports, including volume and prices compiled by Director of Customs and the BCV, transmitted quarterly within five weeks after end of each quarter.
  - A preliminary quarterly balance of payments, compiled by the BCV, forwarded within six weeks after the end of each quarter.
- SOE-related reporting:
  - Statement of Other Economic Flows (GFSM2001 or GFSM2014) relative to holding gains/losses of the previous year with ASA, Electra, EMPROFAC, ENAPOR, and IFH transmitted annually within three months after the end of the following year (15 months after the closing date).
  - Consolidated balance sheet of ASA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year transmitted annually within three months after the end of the following year (15 months after the closing date).
- Specific reform targets and assessments:
  - Pre-announce a schedule for TIM and TRM auctions reform target: assessed as achieved when pre-announcements are posted on the central bank website.
  - Introduce a composite indicator of economic activity reform target: assessed as achieved when the central bank has released the composite indicator.
  - Carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium: assessed as achieved when the study is completed and released.
  - Develop a common framework for the resolution of the crisis related NPLs: assessed as achieved when the common framework is complete and released; the common framework is being developed jointly by the BCV and the World Bank.
  - Construct a Compliance Risk Management (CRM) system to allow optimization of tax revenue collection: assessed as achieved when the MOF provides staff with a copy of methodology.
  - Increase the frequency of stress testing to twice per year: assessed as achieved when the central bank provides the findings of the second annual stress test.
  - Develop and publish an action plan to reduce tax expenditures: assessed as achieved when the MOF provides staff a copy of the approved action plan.
  - Implement the action plan on tax expenditures in the 2025 budget: assessed as achieved when the MOF provides staff a copy of the approved 2025 budget with specification of the actions and impacts.
  - Publish in the SOE report measurable metrics between the MOF and the 6 largest SOEs on financial performance: assessed as achieved when the report is published on the MOF webpage.

### Debt Sustainability Analysis (DSA) summary and public debt coverage
- Risk ratings:
  - 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
- Key DSA findings:
  - Cabo Verde's overall risk of debt distress remains high, consistent with the last joint WB/IMF DSA of June 2023.
  - External debt risk continues to be moderate.
  - The PV of public and publicly guaranteed (PPG) external debt-to-GDP ratio is below the threshold over the forecast horizon and breaches the threshold under the export stress test in line with the last DSA debt path.
  - Liquidity indicators (debt service to revenue and to export ratios) continue to be below respective thresholds under the baseline mainly due to significantly concessional characteristics 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 and breaches the threshold under the stress tests over the forecast period.
- Conditions for sustainability:
  - Sustainable debt dynamics contingent on meeting assumptions including steady economic growth around potential, consistent fiscal consolidation in line with the ECF program, and significant structural reforms, especially related to SOEs.
  - Prudent borrowing policies focusing on concessional external loans, strengthened debt management, and measures to enhance government securities market functioning are critical.
  - Continuous progress in export and output diversification is needed given vulnerability to exogenous shocks.

### Public debt coverage and contingent liability adjustments
- Debt coverage in this DSA:
  - Comprises debt owed by the central government and certain government guarantees.
  - Coverage of public sector is in line with June 2023 DSA.
  - Government guarantees to SOEs’ external borrowing are included in baseline stock of debt: 0.9 percent of GDP at end-2022.
  - Publicly guaranteed domestic debt (8.2 percent of GDP at end-2022) and non-guaranteed domestic debt by SOEs are not included in baseline.
  - Social security funds and local governments are excluded.
  - Coverage of extra budgetary funds (EBFs) is focused on government support to SOEs through on-lending and capitalization.
- Contingent liability tailored stress test amendments:
  - Default shock of 0 percent of GDP for components of general government not captured in baseline stock kept at default level consistent with size of publicly guaranteed domestic debt of local governments.
  - Social security fund (INPS) financial position is strong; contingent liability stress test not adjusted for its exclusion.
  - Default shock of 2 percent of GDP for SOEs’ debt raised to 28.2 percent of GDP to reflect vulnerabilities associated with publicly guaranteed domestic borrowing by all SOEs amounting to bout CVE 20 billion at end-2022 (8.5 percent of GDP) and non-guaranteed domestic debt of a subset of SOEs classified with “very high risk” of insolvency of about CVE 48 billion (19.9 percent of GDP).
  - Default shock of 1.1 percent of GDP is kept for public private partnerships (PPPs).
  - Financial sector shock: with mainly foreign-owned banks that are well-capitalized, default minimum value of 5 percent of GDP for the financial market shock is considered appropriate.

### SOE governance and transparency reforms
- Improvements in SOE reporting and governance include:
  - Adoption of the IMF’s SOE Health Check Tool to strengthen fiscal risk analysis by the SOEs unit (Unidade de Acompanhamento do Sector Empresarial do Estado - 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 improve ownership and oversight of SOE portfolio.
  - Establishment of PARPÚBLICA as company managing the state's corporate investments and IMOPÚBLICA as company managing the state's immovable property.
  - Enhancements to publicly available information such as Portal da Transparência initiative and the SOE Manager platform.
- SOE Manager platform:
  - Digitized ICT tool and database to systematically capture data directly and in real-time from SOEs, automatically generating aggregate performance information and dashboards for UASE.
  - Facilitates preparation of annual aggregate SOE portfolio and quarterly performance reports and helps anticipate potential SOE performance challenges proactively.

*Prepared by the Staff of the International Monetary Fund and the International Development Association*

### Box 1. Considerations on Broadening DSA Coverage in Cabo Verde

### Box 1. Considerations on Broadening DSA Coverage in Cabo Verde

### Rationale for broadening DSA coverage
- The coverage of the Debt Sustainability Framework (DSF) should be as broad as possible.
- According to the 2018 IMF Guidance Note on the Bank-Fund DSF for Low-income Countries (GNDSFLIC), the debt perimeter should encompass almost the entirety of public sector debt including private sector debt guaranteed by the public sector, with the exception of public financial corporations.
- The World Bank’s Debt Reporting heat map shows that in 2021, 13 countries disclose information on central government guarantees (including names of beneficiaries), account payables, collateralization details, and debt-related contingent liabilities.
- A limited definition of public debt in the DSA can contribute to unexpected increases in the level of debt explained by sources outside the defined perimeter.

### Implications for fiscal accounts and key indicators
- If the public sector coverage of the DSA differs from fiscal accounts, additional adjustments on the fiscal accounts will be necessary to ensure consistency.
- The debt service-to-revenue ratio, a key indicator of liquidity, requires its numerator and denominator to be consistent (i.e., in terms of scope).
- If SOEs, a key source of fiscal risk, are part of the public debt, whether directly or through guarantees, it is essential to include any net income they generate in the calculation, as it could be used to repay the debt.
- Where public-sector coverage expands, debt servicing costs for the newly-included items should be separately identified for clarity in the DSA.

### Role of SOEs, recent data improvements, and policy implications
- The IMF and WB are engaging with the authorities to expand the scope of debt coverage consistently.
- The launch of the SOE dashboard, an initiative supported by the WB, in October 2023 should pave the way for the inclusion of SOEs domestically guaranteed debt.
- The SOE manager provides the data needed to widen the DSA perimeter.
- Bank and Fund staff will engage with the authorities to prepare for the broadening of public debt coverage to include domestically guaranteed SOE debt in the next DSA cycle by separately identifying the debt servicing costs for the guaranteed debt.

### Planned steps and expected outcomes
- Engage with authorities to improve data on SOE revenues and net income to allow inclusion of domestically guaranteed SOE debt in the DSA baseline.
- Prepare for inclusion in the next DSA cycle by:
  - Separately identifying debt servicing costs for guaranteed SOE debt.
  - Using the SOE dashboard/SOE Manager to automate data collection, processing, and analysis to enhance monitoring and evaluation of SOE sector performance.
- Expected benefits:
  - Improved consistency between fiscal accounts and DSA coverage.
  - Better assessment and management of fiscal risks stemming from SOEs and public guarantees.

*Source: Box 1. Considerations on Broadening DSA Coverage in Cabo Verde*

### 17.      The DSA assumes a financing mix consistent with a prudent borrowing strategy,

### 17.      The DSA assumes a financing mix consistent with a prudent borrowing strategy,

### Financing assumptions and near‑term mix
- Emphasis on external financing on concessional terms in the near term; domestic debt share remaining broadly stable at about 30 percent.
- Financing for the 2023 budget: mostly concessional and semi-concessional loans, mainly from multilateral institutions including the World Bank, African Development Bank, other bilateral partners.
- Multilateral and bilateral funding for budget support around US$95 million, about 3.6 percent of GDP, is expected to be provided during 2023.
- DSA premise: continued concessional foreign support in the short and medium term; very gradual move toward lower concessional resources in the long term, including semi-concessional loans (with a grant element of less than 35 percent) and limited non-concessional borrowing.
- Domestic debt profile assumes bonds issuance with maturities of at least 4 years in line with the profile of domestic debt portfolio at end-2022.
- Assumed average interest rates: 3 percent for T-bills, and 4 and 5 percent for short-term and medium to longer-term bonds, respectively.
- Authorities have drawn down the US$32 million (1.2 percent of GDP) of the recent SDR allocations to finance the 2022 and 2023 budget.
- Projections subject to risks from tightening monetary policy that could affect the entire yield curve.

### Realism tools, fiscal adjustment, and drivers of growth
- Realism tools flag the fiscal adjustment path as ambitious but considered achievable through:
  - Strengthening domestic revenue mobilization.
  - Expenditure restraint.
  - Average growth near potential.
- Proposed primary balance adjustment path: about 2 percent of GDP over 2023–25; characterized as at the lower bound of the top quartile of the historical distribution for LICs.
- Authorities have implemented measures estimated to increase revenue collections by close to 1 percent of GDP, including:
  - Increased rate of the tourist tax.
  - Implemented the 5 percent duty on previously exempted imports.
  - Continued revenue mobilization efforts including electronic tax invoicing.
- Growth assumptions: relatively persistent and steady growth at about the historical average; one‑off rebound in growth in 2022 makes 2023–24 growth path not consistent with multiplier‑based projections.
- Public investment assumptions:
  - Public investment expected to average about 4.5 percent of GDP in the medium term (lower than the 2022 DSA).
  - Private investment expected to average about 30 percent of GDP over 2023-27.
  - Contribution of public investment to real GDP growth remains marginal, reflecting low multiplier and substantial import content of capital spending.
- Drivers of debt dynamics:
  - Interest rates expected to contribute positively to PPG external debt accumulation (smaller impact than historical experience).
  - Price and exchange rate changes projected to exert downward pressure on debt accumulation to a larger extent than historical experience.
  - For total public debt, projected contribution of real GDP growth to public debt reduction is higher compared to the historical five-year change.
  - Continued fiscal consolidation and restructuring of SOEs will limit the contribution of the primary deficit to public debt accumulation relative to the past five years.
  - Past forecast errors of debt dynamics were mainly driven by unexpected changes in the primary deficit, current account/prices, and exchange rates.

### Country classification and stress test framework
- Debt-carrying capacity assessed as “strong” (as in June 2022 DSA for second review of the PCI).
- Composite indicator (CI) score for Cabo Verde stands at 3.24 based on October 2023 WEO vintage and 2022 CPIA; threshold for “strong” is 3.05.
- CI score contributions: CPIA (45 percent), international reserves (31 percent), world growth (12 percent), remittances (7 percent), country real growth rate (5 percent).
- Debt sustainability analysis uses baseline projections plus six standardized stress tests and a tailored contingent liability stress test addressing incomplete public sector debt coverage.
- None of the tailored stress tests is triggered for Cabo Verde.

### External public debt: baseline and stress outcomes
- Baseline: PV of PPG external debt-to-GDP ratio remains below its threshold throughout the projection period; risk of external debt assessed as moderate (consistent with June 2023 DSA).
- PV of PPG external debt ratios to GDP and exports expected to steadily decrease over time; debt service-to-exports and debt service-to-revenue ratios also decrease continuously through the projection period.
- Under stress tests:
  - PV of PPG external debt-to-GDP ratio breaches its threshold for an extended period under several stress scenarios.
  - Most extreme shock (one-time depreciation): PV of PPG external debt-to-GDP rises to about 75.1 percent in 2025 before gradually decreasing to the threshold of 55 percent of GDP up to 2030.
  - Threshold is breached under four of the remaining six standardized bound tests; breach more protracted under the exports bound test and under the tailored combined contingent liabilities test from 2023-33.
  - PV of PPG external debt-to-exports ratio and debt service to export ratio exceed respective thresholds from 2023–33 under the export stress test.
- Conclusion: moderate risk of external debt distress; limited space to absorb shocks, particularly vulnerable to export shocks due to high concentration in the tourism sector.

### Total public debt, vulnerabilities, and benchmarks
- Baseline: PV of total public debt-to-GDP ratio exceeds the 70 percent benchmark through 2027, giving a mechanical high-risk signal.
- Benchmark is breached under each of the seven standardized bound tests and the tailored combined contingent liabilities test.
- Combined contingent liabilities shock associated with SOEs’ debt is the most severe, with threshold breached throughout the projection period.
- Debt outlook particularly vulnerable to export, growth, and climate disaster shocks.
  - Standardized climate disaster shock assumes an increase of public debt of 10 percent of GDP at the second year of the forecast horizon.
- Debt service projected to average about 37 percent of revenues over the next five years.
- Stress tests show greatest vulnerability to combined contingent liabilities shock associated with SOEs’ debt and growth shock; under these shocks, public debt would remain above the threshold for a prolonged period.
- Mitigating factor: support from Portugal through an agreement to swap debt service payments on some debt to Portugal (worth on average about 6.6 million Euro per year) up until 2025 for climate-related investments.

### Policy implications and recommended priorities
- Need for a prudent approach emphasizing macroeconomic stability and fiscal discipline given uncertainty in the global outlook.
- Authorities should prioritize:
  - Mobilizing additional revenues.
  - Continuing the strategy of only incurring concessional borrowing.
  - Focused implementation of growth-enhancing structural reforms, particularly actions to reduce fiscal risk from SOEs and address infrastructure gaps.
  - Developing the government securities market and lowering costs of domestic borrowing.
- Medium to long-term debt sustainability supported by implementing structural reforms and reducing fiscal risks from SOEs.

### Authorities’ views
- Authorities concur on immediate need to adapt to and mitigate climate risks.
- Emphasized the necessity of transformative reforms to enhance climate-related fiscal policy and build resilience in the energy and water sector.
- Aim to attract private and concessional public funding for climate-focused investments to foster inclusive, resilient economic expansion.
- Highlighted priorities of diminishing poverty and investing in human capital.
- Indicated plan to define specific reform areas and align requests with the proposed RSF program.

### Climate vulnerability and economic costs
- Cabo Verde, as a Small Island Developing State (SIDS), is among countries most vulnerable to climate change: exposed to long-term droughts, desertification, erosion, extreme rainfall events leading to floods, sea level rise, and loss of biodiversity and ecosystems.
- Country suffered five consecutive years of drought causing significant land degradation.
- Notre Dame Global Adaptation Initiative ranks Cabo Verde 77 in 2021.
  - Comparative ranks: Mauritius 48, Saint Kitts and Nevis 58, Saint Lucia 68.
- Annual Average Loss (AAL) from adverse natural events estimated at almost 1 percent of GDP (AAL correspond to expected direct loss per year, averaged over 1980-2020; covers flood, drought, earthquake, and volcanic eruptions, considering only current climate patterns).
- Flood-related risks account for almost 70 percent of aggregated AALs.
- Two structural factors exacerbate impacts:
  - Lack of disaster- and climate-informed urban development expanding assets into risk-prone areas.
  - Lack of coping capacity of vulnerable populations, particularly in rural areas.
- Without adaptation, negative impacts and losses likely to worsen as climate change unfolds.

*Source: Excerpt from the Cabo Verde DSA chapter provided.*

### 3.      Climate change is expected to have a disproportionate impact on poor households

### 3.      Climate change is expected to have a disproportionate impact on poor households

### Impact on poor households and economic sectors
- Remote sensing data and the 2015 Household Expenditure and Income Survey (IDRF-III) show that 67 percent of the population lives in an area that could be affected by high-damage pluvial floods.
- Income of poor households is associated with sectors highly affected by climate change, notably agriculture.
- Climate change is expected to:
  - reduce crop and livestock yields;
  - cause heat stress for workers who primarily work outdoors, with negative effects on labor productivity and potential reductions in the wage bill for agricultural workers;
  - generate negative externalities that reduce local demand in rural economies, where 50 percent of poor households live.
- Coastal areas—critical for tourism and fisheries—are increasingly exposed to climate change, threatening potential nodes of future growth.

### Government policies and commitments — adaptation and resilience priorities
- Strategic frameworks and commitments:
  - Strategic Plan for Sustainable Development (PEDS II) emphasizes decentralization, regional development, territorial convergence, environmental sustainability, climate resilience, biodiversity and geodiversity.
  - Nationally Determined Contribution (NDC) of April 2021 commits to a decarbonized net-zero emissions economy by 2050; the island of Brava is expected to be a pilot aiming for decarbonization by 2040.
  - National Climate Change Adaptation Plan (NCCAP) 2022-2030 aims to: (i) create an enabling environment to mainstream climate adaptation in planning and budgeting; (ii) improve capacity for data and information management, technology and financing access for adaptation; and (iii) implement adaptation actions to increase resilience of the most vulnerable.
  - National Disaster Risk Reduction Strategy (ENDRR) 2018-2030 focuses on preventing disasters, minimizing damage and associated losses, and avoiding creation of new risks.
- Priority sectors for strengthening resilience: water; agriculture; oceans and coastal zones; spatial planning; disaster risk reduction; health.
- Government envisages investments in agroforestry and pastoral resilience, reforestation, restoration of environmental ecosystems, mobilization of water with decentralized renewable energy solutions, massification of sea water desalination, and strengthening of the circular water economy (re-generation of used water) mainly for agriculture.
- Disaster Risk Management (DRM) reforms have moved the country toward a comprehensive risk management approach and enabled risk-informed territorial and sectorial planning.
- Ministry of Finance initiatives include establishment of the National Emergency Fund (FNE) and strengthening fiscal risk management for disaster and climate-related shocks, supported by DRM Development Policy Financing with a Catastrophe Deferred Drawdown Option (Cat DDO).

### Mitigation: emissions trajectory and energy strategy
- Cabo Verde had GHG emissions per capita of "just under 1tCO2eq in 2010."
- With growing energy demand projected to reach approximately 364,000 toe by 2030, associated emissions are expected to increase from 223kt in 2019 to 500kt CO2eq under a business-as-usual scenario.
- Decarbonization targets:
  - reduce GHG emissions by 18 percent below the business-as-usual scenario, and by 24 percent with adequate international support;
  - net-zero emissions economy by 2050; Brava pilot aims for 2040.
- Emissions by sector: transport sector expected to generate the highest emissions, averaging about 373 kt CO2eq per year between 2020 and 2030.
- National Program for Sustainable Energy and Power Sector Master Plan (2018-2040) objective: 54 percent of power generation from variable renewable energy (VRE) sources by 2030.
  - Current VRE: 18 percent of power generation (31.5 MW out of a total current installed capacity of 176 MW).
- Identified investments of €518 million for 2019-2030 for VRE integration, grid reinforcement and modernization, a risk mitigation facility, distributed generation, and e-mobility.
- Key challenges to the energy transition: high off-taker risk, insufficient funding and incentives for private sector, small project sizes, need for de-risking investments, aggregation of smaller projects, investments in grid modernization, storage and ancillary services.

### Fisheries, tourism, and blue economy vulnerabilities
- Fisheries sector:
  - Fish products account for over 60 percent of the nation's exports.
  - Fisheries contributed 9 percent of GDP in 2021.
  - Fish is a critical source of micronutrients and animal protein, second only to poultry.
  - 80 percent of fishers derive their livelihoods from fishing, predominantly on the smaller and less affluent islands.
- Rapid expansion of tourism has degraded natural resources and marine biodiversity, produced poor coastal management and increased environmental pressure.
- Government pursuing a more diversified, sustainable, inclusive, and resilient tourism model; Tourism Operational Plan (2022-2026) aims to catalyze more tourism flows to emerging islands and segments beyond core sun & sea offering.

### Financing, institutional capacity, and risk management challenges
- Climate finance snapshot:
  - In 2019–20, an average of US$21 million were invested in climate-related activities from public sectors, with the private sector contributing about 2 percent.
  - Latest NDC defines needs of US$213 million per year (around US$2 billion in the period 2020-2030).
- Cabo Verde has piloted instruments: blended financing loans, ESG bonds, blue bonds, sustainable bonds, debt for climate swap, considering carbon credit monetization structures and establishment of a Climate Investment Fund.
- Constraints to mobilize private investment include high cost of capital due to perceived risk and high public debt, transport and logistics bottlenecks, energy constraints, and business environment issues including competition.
- Public investment must be selective given limited fiscal space and high public debt; international funding and private sector participation are critical.

### Social protection, human capital, and information needs
- Disaster Risk Management and Adaptive Social Protection Programs are key to proactively manage risk and impacts on population.
- Interplay of social exclusion and climate impact can create poverty cycles, weaken social cohesion, and increase social tensions and volatility.
- Priority actions to enhance resilience:
  - Target the most vulnerable and mobilize household adaptive capacities and resilient livelihoods.
  - Greater investments in human capital to build climate resiliency and preparedness.
  - Education reforms and specific training programs to create a culture of climate preparedness and instill environmental stewardship early.
  - Prioritize skills development programs that prepare workers for careers in adaptation and low-carbon technologies ("green jobs").
- Adequate disaster and climate hazard and risk information is critical for decision-making, prioritization of resources, and development of long-term resilience and adaptation strategies.

### World Bank engagement and support
- World Bank support includes financing and technical assistance to:
  - strengthen institutional and legal frameworks for risk-informed sectoral and territorial planning;
  - increase financial capacity to manage disaster and climate impacts;
  - enhance resilience of public investments by incorporating climate and disaster risk in evaluation of new public investment projects;
  - sectoral reforms to enhance climate resilience in energy, blue economy and transport.
- Examples of Bank-supported projects:
  - Renewable Energy and Improved Utility Performance project (promoting on-grid solar PV);
  - Resilient Tourism and Blue Economy Development project (addressing vulnerability in tourism, fisheries, and urban sectors).
- Technical assistance has included options for creation of a nature and climate-dedicated fund to catalyze additional, longer-term and low-cost climate financing.

*Source: Cabo Verde country report chapter on climate change impacts, adaptation, mitigation, financing, and institutional responses.*

### 2.6 billion. The net international reserves floor was also exceeded by almost 10 percent. The

### 1cpvea2024001 - 2.6 billion. The net international reserves floor was also exceeded by almost 10 percent. The

### Program performance and conditionality
- Macroeconomic improvement and strong program performance attest to Cabo Verde’s program as a successful example of good design, with focused conditionality based on the government’s own plans and geared at measures critical to ensure the desired results.
- The request for the modification of PCs is described as purely technical and is supported by staff.
- Changing the PV of new external debt for end-December 2023 is needed to accommodate a new schedule of World Bank disbursements.
- The modification on other net liabilities reflects intrinsic uncertainty in privatization receipts.
- The disbursement released by this review will support implementation of the government’s policies and reform agenda under the Sustainable Development Strategic Plan 2022-2026 (PEDS II).

### Fiscal performance and policy
- Fiscal performance has surprised on the upside so far this year.
- Central government posted a significant primary surplus in the year to the third quarter given outstanding revenue performance.
- Fiscal revenues increased at a robust 2-digit pace: 15.7 percent y-o-y in the third quarter.
- Expenditure growth was contained to 3.7 percent y-o-y in the third quarter.
- Even with some accommodation on revenue growth for the remainder of the year, together with improved budget execution, the primary balance is expected to close the year stronger than initially anticipated, meeting the QPC by a wide margin.
- The 2024 budget is in line with program commitments and will deliver the required primary result without compromising social and economic needs.
- Further spending rationalization, including reducing subsidies and tax expenditures, will play an important role in fiscal performance in 2024.
- Authorities expect GDP growth and revenue collection to underpin better than anticipated results in the 2024 budget.
- Resources are being committed to support coordinated action to meet the goal of eradicating extreme poverty by 2026.
- Concessional resources will support critical investment in infrastructure and human capital to advance sustainable, equitable, digital development.
- Authorities are committed to accelerate reforms to streamline and improve efficiency of the SOE sector and are enhancing monitoring and assessment of SOE performance with integrated digital platforms to enable data-driven management and reduce recurring losses.
- Completing the reorganization of Air Cabo Verde (TACV) and resuming its privatization is a key goal.

### Debt outlook and targets
- Sustained consolidation will keep public debt on a downward path.
- Debt reached almost 145 percent of GDP in 2021 and is set to fall below 120 percent this year.
- Other avenues to reduce the debt burden are being pursued, including an agreement in principle with Portugal to explore the possibility of debt-for-nature swaps.
- The goal for the next four years is to reach a debt to GDP ratio of under 100 percent and to continue on a downward path until a more sustainable level is attained.
- Fiscal overperformance in 2023 and consistent implementation of the reform agenda increase prospects for meeting these targets ahead of schedule.

### Monetary and financial sector policies
- The Bank of Cabo Verde (BCV) has acted to protect the peg, strengthen monetary policy transmission, and ensure financial sector stability.
- Interest rates have been raised this year to narrow the differential with respect to the ECB.
- The BCV will follow developments in the euro area closely and adjust its stance accordingly to avoid undue pressure on international reserves.
- Reserves are currently above the target range of 5½ to 6 months of projected imports.
- Authorities are strengthening monetary policy transmission by pre-announcing a schedule for bond auctions and enhancing statistical and analytical capabilities, including for macroeconomic forecasts.
- Cabo Verde’s financial sector has shown resilience and remains stable, adequately capitalized, and liquid.
- A comprehensive study of loan losses and provisions at the expiration of the credit moratorium found the banking system is well placed to withstand it.
- Further work is underway to enhance NPL monitoring procedures and support resolution of crisis-related NPLs.
- Revamped stress tests will be applied twice a year to increase financial system resilience.
- Authorities intend to develop a national fintech strategy, with support from the World Bank, to establish pillars for financial technologies to embrace innovation, foster competition and lower financial transaction costs.
- Draft legislation amending the BCV Organic Law in line with IMF safeguards assessment recommendations, aiming to enhance central bank independence, accountability, and transparency, will be submitted by mid-next year to the National Assembly.

### Reform agenda, climate vulnerability, and the RSF request
- Cabo Verde is identified as one of the most vulnerable countries in the world to climate change, despite being one of the lowest per capita GHG emitters.
- Structural features increasing vulnerability include territorial discontinuity, eco-system fragility, and scarcity of potable water and arable land, compounded by dependence on food and energy imports.
- Five years of drought, economic fallout from the pandemic, and ripple effects from the war in Ukraine contributed to 10 percent of the Cabo Verdean population facing acute food insecurity.
- The poorest households are most vulnerable to climate hazards such as desertification, erosion, and floods.
- Slow-onset sea level rise and biodiversity loss pose an existential threat to the archipelago and require immediate action and planning.
- Transitioning to a green, circular economy is presented as an opportunity to address vulnerabilities and foster development.
- Moving to an energy matrix based on renewable sources (solar and wind) will address reliance on imported fuel and allow for extensive water desalination to reduce vulnerability in food production; water reuse will be critical.
- The RSF will leverage private and other partners’ resources and support a comprehensive reform agenda focused on the climate agenda.
- The RSF will cover five main reform areas:
  - (i) governance of climate change policy,
  - (ii) fiscal risk and climate-resilient public investment frameworks,
  - (iii) policies to foster energy efficiency and transition,
  - (iv) long-term planning for water resources and climate impacts,
  - (v) financial sector resilience to climate change.
- The reform agenda is guided by IMF and World Bank diagnostics including the C-PIMA and the CCPA and is in line with Cabo Verde’s Sustainable Development Strategy 2022-2026 (PEDS II).
- Many reform actions are already in the pipeline and will be supported by development partners such as the World Bank, the AfDB and bilateral agencies.

### Concluding observations
- Cabo Verde has benefitted from consistent engagement with the Fund under the PCI and now under this ECF arrangement; macroeconomic stabilization and reform efforts have been supported by policy dialogue with Fund staff.
- Authorities’ steadfast commitment and high ownership of policies and reforms underpin strong performance under IMF arrangements despite adverse circumstances.
- Despite auspicious economic performance, more work is needed; the ECF reform agenda is being joined by a comprehensive reform agenda to cope with climate change challenges.
- These efforts are complementary, and the authorities count on continued support of the Fund to achieve key strategic goals.

*Source: 1cpvea2024001 - 2.6 billion. The net international reserves floor was also exceeded by almost 10 percent. The*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1cpvea2024001.pdf_