## CABO VERDE — FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR A WAIVER OF NONOBSERVANCE OF QUANTITATIVE PERFORMANCE CRITERION, MODIFICATION OF QUANTITATIVE PERFORMANCE CRITERIA, AND SECOND REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY ARRANGEMENT ## Source details **Canonical URL:** [CABO VERDE — FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR A WAIVER OF NONOBSERVANCE OF QUANTITATIVE PERFORMANCE CRITERION, MODIFICATION OF QUANTITATIVE PERFORMANCE CRITERIA, AND SECOND REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY ARRANGEMENT](https://www.imf.org/-/media/files/publications/cr/2025/english/1cpvea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1cpvea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1cpvea2025001-print-pdf.pdf.json) --- ### Executive summary, access, and program stance - Completion of the fifth ECF review allows the authorities to draw the equivalent of SDR 4.5 million (approximately US$ 5.87 million). - Completion of the second RSF review will allow disbursement of SDR 2.632 million (approximately US$ 3.43 million). - ECF arrangement: 36-month, approved June 2022, SDR 45.03 million, 190 percent of quota. - RSF arrangement: 18-month, approved December 2023, SDR 23.7 million, 100 percent of quota. - Staff supports: - a waiver for non-observance of the end-June 2024 PC on gross international reserves (GIR) based on BCV corrective actions; - modification of end-December 2024 QPCs on GIR, domestic financing, and the NPV of new external debt ceilings in line with revised 2024 financing assumptions. ### Recent macroeconomic developments and outlook - Growth and activity: - Real GDP growth projected at 6 percent in 2024. - Real GDP growth projected at 5 percent in 2025, converging gradually from 2026 to potential growth of 4.8 percent (by 2029). - Economic activity grew almost 9.7 percent y-o-y in the first half of 2024 (noted alternatively as 9.4 percent in first semester of 2024 in other excerpts). - Inflation: - CPI inflation stood at 1.0 percent (annual average) in October 2024 and registered a 1.7 percent y-o-y increase. - Inflation forecast at 2 percent over the medium-term; inflation expected to be below 2 percent in 2024. - Staff forecast: inflation 1.5 percent end-2024 and 2 percent in 2025 in staff appraisal. - External sector and reserves: - Current account recorded a surplus of 1.2 percent of GDP during the first three quarters of 2024; projected to shrink to a deficit of 0.3 percent of GDP in 2024 (from 2.2 percent in 2023). - Gross international reserves (GIR): €666 million at end-June 2024 (target €693 million); fell to €625 million in August 2024; recovered to €661 million at end-October 2024; projected at €646 million by end-2024. - GIR coverage: projected to stand at 5.1 months of imports by end-2024, down from 5.6 months of imports during the fourth review. BCV targets international reserves in the range of 5 to 5½ months of prospective imports and projects stabilization at 5.5 months of imports. - GIR floor for end-June 2024 missed by 8 million euros after using adjusters. - Tourism and external receipts: - Tourism recovery uneven: Sal and Boa Vista key drivers with visitor numbers "over 60,000" and "25,000" per month respectively on peak months; island-level tourism elasticities: around 0.5 overall after six months; about 0.7 for Sal and Boa Vista; about 0.4 for non-tourism-centric islands. ### Fiscal performance, budget, and public debt - 2024 fiscal outturns and near-term: - Primary deficit projected at 0.1 percent of GDP in 2024 (improvement from a 0.6 percent of GDP deficit in the fourth review). - Primary balance in Q3 2024 registered a surplus of CVE 3,607 million versus program projection of CVE – 2,740 million. - Tax revenues increased 13 percent y-o-y through end-September 2024. - Draft 2025 budget targets a primary surplus of 0.4 percent of GDP (above program target of zero balance). - Budget clause empowers the Ministry of Finance to hold back goods and services expenditures to target program primary balance (0.4 percent of GDP). - Revenues and measures: - Non-recurrent second installment of airport concession fee: CVE 4,961 million. - Revised program projections for other revenues are CVE 5,175 million higher than at the fourth review. - Tax-to-GDP ratio projected to increase by 0.9 percent of GDP in 2025: 0.5 percent of GDP from reducing customs exemptions; 0.4 percent of GDP from introduction of a tourism tax on arrivals. - Additional measures: reduction of CIT exemption on import component of large investments yields 0.3 percentage points of GDP in 2026; proposed VAT legal framework changes expected to yield 0.2 percent of GDP in 2026. - Spending and financing: - Primary spending-to-GDP ratio envisaged 2 percentage points above fourth review projections; half due to higher spending on goods and services tied to PI pipeline studies, half by expansion of transfers to municipalities. - Net domestic financing projected to be 1.6 percentage points of GDP lower relative to 2024 (alternative phrasing: 1.7 percent of GDP lower in other excerpt). - Net external financing in 2025 projected slightly higher than during fourth review due to postponement of IMF disbursements from end-2024 to 2025 and first disbursement from Global Gateway package by EU. - Public debt: - Public debt (program basis) projected to decrease from 116.4 percent in 2023 to 111.8 percent at end-2024. - Public debt-to-GDP ratio projected to improve to 107.1 percent by end-2025. - DSA incorporates domestically guaranteed debt to SOEs and municipalities; Cabo Verde’s risk of external debt distress remains moderate; overall risk of debt distress remains high. - Authorities mentioned a target of around 70 percent of GDP by 2034 (based on current program coverage) as a potential medium-term anchor. ### Program performance, conditionality, and RSF reform measures - Quantitative and structural performance: - All quantitative performance criteria (QPCs) for end-June 2024 met along with continuous PCs, except the QPC on GIR. - All Indicative Targets (ITs) to September 2024 met, except IT on GIR. - Structural Benchmarks (SBs): one SB due end-June 2024 and two SBs due end-September 2024 were met; SB due end-July 2024 implemented with a short delay (completed in September). - RSF progress and Reform Measures (RMs): - One RSF Reform Measure (RM2: Fiscal Risk Statement with quantitative analysis linked to climate change risk) completed with Budget 2025. - RM7 (Unique Social Registry expanded to all poor and vulnerable households) completed; extension to climate-vulnerable households delayed pending RM8 vulnerability maps. - RM3 (PPP legal framework amendments) completed. - RM4 (climate finance mobilization strategy) on track; pipeline to be published mid-December; expected completion end-April 2025. - RM5 (electricity cost-recovery tariff methodology) on track for end-April 2025. - RM6 (water sector cost-recovery) on track with scope likely narrowed to Santiago Island; timing end-April 2025. - RM7, RM8 and RM9 delayed and proposed to be assessed at the next review; RM9 (BCV climate information architecture for banks) delayed pending consultancy and CD in 2025. - Use of RSF resources: - RSF disbursements would increase external financing by about CVE 0.7 billion in 2024 and 2.5 CVE billion in 2025 (alternate text: CVE 1 billion in 2024 and CVE 2.1 billion in 2025 noted elsewhere). - RSF substitutes more expensive domestic financing with cumulative estimated savings in debt service of 0.7 percent of GDP until 2029. ### Monetary policy, liquidity, and financial sector soundness - Central bank actions and objectives: - Banco de Cabo Verde (BCV) implemented two policy rate increases totaling a cumulative 75 basis points in November and December 2024 (25 bps in November and 50 bps in December) to a policy rate of 2.25 percent. - BCV raised the overnight lending rate and the liquidity absorption rate in line with the policy rate increase and provided forward guidance to indicate intent of closing the differential with the ECB policy rate. - Staff recommends continued tightening to reduce the interest rate differential with the European Central Bank’s policy rate and protect external buffers. - Monetary aggregates and liquidity: - M2 grew at 7.9 percent (y-o-y) as of September-2024. - Total deposits grew by 7.6 percent (y-o-y). - Credit to the economy grew by 7.1 percent (y-o-y). - BCV increased open market operations from CVE 6.5 billion to CVE 9.6 billion in October 2024 and sterilized around 48 percent of liquidity injections during 2024. - Excess liquidity drivers: minimum reserve requirement reduced from 13 to 10 percent during pandemic; OMF and other long-term liquidity injections. - Recommendation: gradually increase reserve requirements towards pre-pandemic norms and carry out more active open market operations to mop up excess liquidity and support reserve accumulation. - Financial sector soundness indicators (end-September 2024): - Regulatory capital to risk-weighted assets (CAR): 22.5 percent (down from 23.8 percent at end-December 2023; regulatory minimum 12 percent). - Return on equity: 13.4 percent. - Return on assets: 1.4 percent. - Non-performing loans (NPLs): increased from 7.3 percent at end-2023 to 11 percent of total loans at end-September 2024 (also reported as up from 8.3 percent in Q1 to 11 percent in Q3 2024). - NPLs concentrated in transport sector (SOEs), real estate related to tourism, construction, and trade. - Seven banks hold assets equivalent to 126.4 percent of GDP as of end-September 2024; two domestic systemically important banks account for a large share of assets and deposits. - Recommendation: BCV should use supervisory tools and macroprudential measures, update prudential provisioning guidelines, increase stress test frequency, and design resolution frameworks. - AML/CFT and safeguards: - BCV implemented recommendations of the 2022 safeguards assessment; amendments to the Organic Law of the BCV submitted to parliament with slight delay in September and expected discussion in early 2025. - AML/CFT reforms: establishment of AML/CFT team within Department of Microprudential Supervision in 2024; proposal for an independent AML/CFT unit and inclusion in BCV's 2025–2028 strategic plan; Notice No. 1/2024 mandates prior registration of key functions. ### Debt management, DSA highlights, and contingent liabilities - Debt coverage and expansions: - DSA perimeter expanded to include stock of uncalled domestically guaranteed debt to loss-making SOEs: 8 percent of GDP at end-2023; municipalities 0.2 percent of GDP at end-2023. - Government-guaranteed SOE debt: 0.7 percent of GDP at end-2023 (external). - Key DSA numbers and projections: - Public debt (program basis): 116.4 percent in 2023; projected 111.8 percent at end-2024; 107.1 percent by end-2025. - Total nominal government debt series (selected): 148.0 126.8 116.4 110.0 111.8 107.1 102.0 96.4 91.3 86.5 (as in source). - PV of PPG external debt percent of GDP (selected): 57.2 53.5 ...54.2 51.3 50.7 48.6 45.5 42.6 40.3 38.4 (as in source). - Public external debt represented 80 percent of GDP at end-2023; external debt held by SOEs accounts for 0.7 percent of GDP. - Average interest rate on external debt: about 1.07 percent; average maturity: about 15.2 years. - Central government domestic debt: 36.2 percent of GDP at end-2023; domestic public debt: 44.8 percent of GDP at end-2023. - Treasury bonds accounted for 96.4 percent of central government domestic debt. - Debt service and liquidity indicators: - Central government domestic debt service at end-2023: 4.9 percent of GDP. - Debt service on uncalled domestic guarantees to SOEs in 2023: 3.1 percent of GDP (non-cashflow if guarantees not called). - Total public debt service including uncalled guarantees absorbed about 51 percent of revenue and grants in 2023 and is projected to reach 56 percent in 2029. - DSA risk ratings and stress tests: - Risk of external debt distress: Moderate. - Overall risk of debt distress: High. - PV of total public debt-to-GDP projected to breach the threshold during 2024–2029 under the baseline due to inclusion of domestically guaranteed SOE debt; breaches occur under stress tests. - Tailored contingent liability shock: 10.5 percent of GDP derived in DSA. - Staff recommends prudent borrowing policies favoring concessional external loans and enhanced SOE performance to reduce fiscal risks. ### Risks, RAM, and policy responses - Overall risk assessment: - Risks assessed as moderate for program; overall risk of debt distress remains high. - Conjunctural risks with relative likelihoods and impacts: - Intensification of regional conflicts: Relative Likelihood: High; Impact if Realized: High. - Global growth slowdown: Relative Likelihood: Medium; Impact if Realized: Medium. - Commodity price volatility: Relative Likelihood: High; Impact if Realized: High. - Structural risks: - Deepening geoeconomic fragmentation: Relative Likelihood: High; Impact if Realized: High. - Extreme climate events: Relative Likelihood: Medium; Impact if Realized: Medium/High. - Domestic risks: - Faltering fiscal consolidation efforts: Relative Likelihood: Medium/High; Impact if Realized: High. - Delays in implementing SOE and productivity measures: Relative Likelihood: Medium; Impact if Realized: Medium. - Policy responses prioritized: - Maintain adequate reserves and fiscal consolidation; rely on concessional financing. - Tighten monetary policy further and provide clear forward guidance to close interest rate differential with the ECB. - Strengthen SOE governance, transparency, and performance; pursue privatization or restructuring where appropriate. - Build climate resilience through RSF reforms, prioritize climate-resilient public investment, and mobilize private climate finance. - Use macroprudential tools and supervisory actions to address rising NPLs and concentration risks. ### Key operational and program monitoring features (TMU and conditionality modifications) - Authorities requested: - Waiver for non-observance of the end-June 2024 PC on GIR based on BCV corrective actions. - Modification of the end-December 2024 PC on GIR to reflect the lower base. - Modification of end-December QPCs on domestic financing and the NPV of new external debt ceilings in line with revised financing assumptions for 2024. - Program monitoring and reporting: - Program monitored through QPCs, ITs, and SBs with reporting requirements for DNP and BCV (monthly and quarterly with specified lags). - GIR reporting: BCV to transmit a table on GIR monthly with maximum delay of four weeks. - Technical program definitions include unified discount rate of 5 percent for PV calculations and program exchange rate of CVE 98.8 per one USD for conversion. - Financing assurances: - The Fund-supported program continues to be fully financed with firm commitments for the next 12 months, until the end of the program. - Net external financing lower than projected in the fourth review due to under-execution of capital expenditures and postponements of disbursements; offset by reduction in gross financing needs and domestic financing supported by strong position of domestic holders of government debt. - Capacity development: - CD priorities: revenue mobilization, public financial management (including climate), central bank operations, banking supervision, financial stability, macro statistics. - IMF CD delivery (FY25, USD millions): FAD, 1.5; MCM, 0.4; STA, 0.2; ICDD, 0.1; LEG, 0.1. ### Staff recommendation and mission timing - Staff recommends: - Completion of the fifth review under the ECF and the second review under the RSF arrangements. - Approval of the waiver for the nonobservance of the GIR QPC and modifications to end-December 2024 QPCs on GIR, domestic financing, and NPV of new external debt ceilings. - Assessment of RMs 7, 8 and 9 at the next review given delays. - Mission: - Mission discussions took place in Praia, Cabo Verde during November 18-26, 2024. - Statement by Acting Chair and Deputy Managing Director Bo Li issued following the Executive Board discussion emphasizing strong 2024 activity, low inflation, downside risks, need for SOE reforms, and continued RSF implementation. *Source: Cabo Verde — Fifth Review Under the Extended Credit Facility Arrangement, Request for a Waiver of Nonobservance of Quantitative Performance Criterion, Modification of Quantitative Performance Criteria, and Second Review Under the Resilience and Sustainability Facility Arrangement (Executive Summary and selected sections).* ### 2023. The completion of the fifth ECF review allows the authorities to draw the equivalent of ### CABO VERDE — FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR A WAIVER OF NONOBSERVANCE OF QUANTITATIVE PERFORMANCE CRITERION, MODIFICATION OF QUANTITATIVE PERFORMANCE CRITERIA, AND SECOND REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY ARRANGEMENT ### Executive summary and program access - Completion of the fifth ECF review allows the authorities to draw the equivalent of SDR 4.5 million (approximately US$ 5.87 million). - Completion of the second RSF review will allow disbursement of SDR 2.632 million (approximately US$ 3.43 million). - A 36-month ECF arrangement (approved June 2022, SDR 45.03 million, 190 percent of quota) supports the government’s agenda to strengthen public finances, lower debt, improve public enterprises, modernize monetary policy, and boost growth. - An 18-month RSF arrangement (approved December 2023, SDR 23.7 million, 100 percent of quota) focuses on climate reforms and mobilizing private finance for climate adaptation and transition. - Staff support a waiver for non-observance of the end-June 2024 PC on gross international reserves (GIR) based on corrective actions by BCV, and support modification of end-December 2024 PCs on GIR, domestic financing, and the NPV of new external debt ceilings in line with revised 2024 financing assumptions. ### Recent macroeconomic developments - Growth drivers: rebound in tourism, robust export performance, private consumption growth, and remittances; investment remains a drag due to slow execution of the government’s capital budget. - Political context: municipal elections on December 1, 2024 went smoothly; elections in 2026 could put pressure on public finances. - 2024 macro performance: - Real GDP growth projected at 6 percent in 2024. - Economic activity grew almost 9.7 percent y-o-y in the first half of 2024. - CPI inflation stood at 1.0 percent (annual average) in October 2024 and registered a 1.7 percent y-o-y increase. - Primary deficit projected at 0.1 percent of GDP in 2024 (improvement from a 0.6 percent of GDP deficit in the fourth review). - Tax revenues increased 13 percent y-o-y through end-September 2024. - Primary balance in Q3 2024 registered a surplus of CVE 3,607 million versus program projection of CVE – 2,740 million. - External sector and reserves: - Current account recorded a surplus of 1.2 percent of GDP during the first three quarters of 2024 and is projected to shrink to a deficit of 0.3 percent of GDP in 2024 (from 2.2 percent in 2023). - Gross international reserves (GIR): €666 million at end-June 2024 (target €693 million); fell to €625 million in August 2024; recovered to €661 million at end-October 2024; projected at €646 million by end-2024. - GIR coverage: projected to stand at 5.1 months of imports by end-2024, down from 5.6 months of imports during the fourth review. - Capital imports: imports of capital goods projected to decline to 10.4 billion CVE in 2024 versus a projected increase to 20.9 billion CVE in the fourth review; assumed import content for capital spending around 90 percent. ### Program performance and conditionality - Performance under the ECF: - All quantitative performance criteria (QPCs) for end-June 2024 were met along with the continuous PCs, except the QPC on GIR. - All Indicative Targets (ITs) to September 2024 were met, except IT on GIR. - Structural Benchmarks (SBs): one SB due end-June 2024 and two SBs due end-September 2024 were met; the SB due end-July 2024 was implemented with a short delay in September. - RSF progress: - One RSF Reform Measure (RM) completed at end-November 2024. - Three RM7, RM8 and RM9 delayed and to be assessed at the next review. - Program expires in June 2025; authorities indicated desire for continued engagement. - Corrective monetary actions: - Banco de Cabo Verde (BCV) implemented two policy rate increases totaling a cumulative 75 basis points in November and December 2024 and provided forward guidance to indicate intent of closing the differential with the ECB policy rate. - Staff support BCV’s corrective actions and the waiver request for the GIR PC nonobservance. ### Outlook and projections - Growth and inflation: - Real GDP growth projected at 6 percent in 2024 and 5 percent in 2025, converging gradually from 2026 to potential growth of 4.8 percent (by 2029). - Inflation forecast at 2 percent over the medium-term, broadly in line with euro area inflation; inflation expected to be below 2 percent in 2024. - External balances and debt: - Current account deficit estimated to have narrowed in 2024 and to stabilize at around 2.5 percent of GDP over the medium-term. - Debt trajectory: public debt-to-GDP ratio continues to decline; debt projected to continue declining as the primary balance moves to a surplus in 2025 and thereafter improves to over 1 percent of GDP. - Risks: - Downside risks: weakened demand in major tourism markets; external price shocks; climate change effects (droughts, sea level rise, natural disasters) affecting coastal infrastructure and tourism; fiscal risks from SOE performance; high level of debt and need for concessional financing to limit debt servicing costs. - Upside: stronger tourism growth could boost overall activity. ### Policy discussions and recommendations - Fiscal policy and debt sustainability: - Strengthen public finances to preserve debt sustainability through domestic revenue mobilization and steadfast progress on fiscal structural reforms while protecting social spending and enhancing public investment execution. - Staff support modification of QPCs on domestic financing and NPV of new external debt ceilings in line with revised financing assumptions for 2024. - State-owned enterprises (SOEs): - Reduce fiscal risks from SOEs and improve their financial management; reform of SOEs remains critical to limit fiscal risks and improve services. - Monetary policy and financial sector: - Monetary policy focus on safeguarding the exchange rate peg. - BCV should continue to tighten rates to reduce the interest rate differential with the European Central Bank’s policy rate and protect external buffers. - Financial sector: stable, capitalized, profitable, and liquid, but with rising non-performing loans requiring close monitoring. - Structural and climate resilience reforms: - Continue implementing the ambitious structural reform agenda, particularly RSF reform measures, to catalyze broader financial and technical support for building climate resilience. ### Mission and timing - Mission discussions took place in Praia, Cabo Verde during November 18-26, 2024. - Statement by Acting Chair and Deputy Managing Director Bo Li issued following the Executive Board discussion emphasized strong 2024 activity, low inflation, downside risks, generally strong program performance, the need for SOE reforms, and continued RSF implementation. *Source: Cabo Verde — Fifth Review Under the Extended Credit Facility Arrangement, Request for a Waiver of Nonobservance of Quantitative Performance Criterion, Modification of Quantitative Performance Criteria, and Second Review Under the Resilience and Sustainability Facility Arrangement (Executive Summary and selected sections).* ### 4.9 percent compared with 16.6 percent in the fourth review. Weaker import growth, coupled with ### 1cpvea2025001-print-pdf - 4.9 percent compared with 16.6 percent in the fourth review. Weaker import growth, coupled with ### External Sector and Reserves - Current account deficit narrowed to 0.3 percent of GDP in 2024, down from 5.2 percent in the fourth review. - Gross international reserves (GIR): - GIR floor for end-June 2024 missed by 8 million euros after using adjusters. - GIR remain within the interval followed by the BCV as a share of months of imports. - The BCV targets international reserves in the range of 5 to 5½ months of prospective imports. - Gross international reserves are projected to stabilize at 5.5 months of imports. - Banks’ external assets and impact on reserves: - Banks’ external assets increased from €29 million at end-2022 to €229 million at end-October 2024. - The increase in banks’ external assets has placed significant pressure on the BCV’s ability to accumulate reserves, resulting in the decline in the level of reserves and coverage in months of imports. - Evolution of reserves under the program: - Actual monthly euro levels shown from Jun-22 to Mar-25 in program charts (millions of euros). ### Monetary Policy and Liquidity - Monetary Policy Committee actions: - Policy rate raised by 25 bps in November and by 50 bps in December to 2.25 percent. - BCV also raised the overnight lending rate and the liquidity absorption rate in line with the policy rate increase. - Forward guidance provided on intent to close the interest rate differential with the ECB and protect reserves. - Interest rate differential and behavior: - Post COVID, BCV maintained a negative interest rate spread with the ECB, incentivizing banks to increase external assets. - Differential between ECB policy rate and BCV policy rate shown in text figures. - Monetary aggregates as of September-2024: - M2 grew at 7.9 percent (y-o-y). - Total deposits grew by 7.6 percent (y-o-y). - Credit to the economy grew by 7.1 percent (y-o-y). ### Financial Sector Soundness - Core indicators at end-September 2024: - Regulatory capital to risk-weighted assets (CAR): 22.5 percent (down from 23.8 percent at end-December 2023; regulatory minimum 12 percent). - Return on equity: 13.4 percent. - Return on assets: 1.4 percent. - Non-performing loans (NPLs): increased from 7.3 percent at end-2023 to 11 percent of total loans at end-September 2024. - NPL concentration and credit risks: - NPLs concentrated in transport sector (SOEs), real estate related to tourism, construction, and trade. - Credit-at-risk increasing, raising concerns of future risks. - Financial stability risks include large sovereign exposures, high NPLs and credit risks linked to SOEs, and high credit and deposits concentration for most banks. ### Outlook and Risks - Growth and inflation: - Growth projected at 5 percent in 2025, converging gradually to a potential growth rate of 4.8 percent. - Inflation forecast to be below 2 percent in 2024 and stay at that level over the medium-term, broadly in line with Euro-area inflation. - Current account and capital expenditures: - Current account deficit expected to widen over the medium term to about 2.5 percent of GDP, largely driven by higher capital expenditures associated with climate-related reform measures and private sector investment plans. - Medium-term current account deficit expected to be slightly narrower than previously due to stronger remittances and exports of tourism. - Fragilities and risk factors: - Economy’s small size, lack of export diversification, and vulnerability to exogenous shocks warrant a prudent level of reserves. - Downside risks: world and regional conflicts, economic slowdown, new energy shocks, climate change effects (droughts, sea level rise, natural disasters). - Upside risks: faster-than-expected growth in major trading partners, strong progress in structural reforms, improving inter-island connectivity. - Political risks: pre-election pressures could slow reforms; failure to advance SOE reforms could be a major fiscal risk. - Debt vulnerability: country’s high-risk level of debt highlights importance of concessional financing to limit debt servicing cost. ### Tourism and Regional Impacts (Box 3) - Tourism recovery uneven across islands: - Sal and Boa Vista drove recovery: visitor numbers soared to over 60,000 and 25,000 per month, respectively. - Santiago, São Vicente, and Santo Antão recovering more slowly and remain below pre-pandemic levels. - Smaller islands continue to see modest visitor numbers, still far from previous trends. - Empirical findings on tourism elasticity (island-level VAT): - Estimated tourism elasticity of VAT collections across all Cabo Verde islands: around 0.5 after six months. - Elasticity for tourism-centric islands (Sal and Boa Vista): about 0.7. - Elasticity for non-tourism-centric islands: about 0.4. - Policy implication: improving inter-island connectivity is key to spreading tourism benefits across the national economy. ### Program Performance and Fiscal Policy - Performance under ECF and RSF arrangements: - All QPCs for end-June 2024 met, along with continuous PCs, except the floor on GIR (missed by 8 million euros). - All Indicative Targets to September met, except GIR for end-September. - SBs related to SOE and fiscal sector reforms for end-June and end-September 2024 have been met. - RSF reform measures (RMs) progress: - RM2 (Fiscal Risk Statement with quantitative analysis linked to climate change risk) published with Budget 2025. - RM7 (Unique Social Registry expanded to all poor and vulnerable households) completed; extension to climate-vulnerable households delayed pending vulnerability maps (RM8) — expected early 2025. - RM9 (climate information architecture for banks) delayed as BCV builds capacity; BCV provided online training with MCM and additional CD planned. - 2025 budget alignment and fiscal stance: - Budget targets a primary surplus of 0.4 percent of GDP (above program target of zero balance). - Capitalization costs not foreseen in the program are offset by higher primary surplus and use of deposits. - Staff assesses the overall impact of the budget on public debt is in line with program projections and meets criteria to complete the SB for end-December 2024. - Key fiscal figures (Text Table 1 excerpts, preserved formatting of values): - Revenue: 77,050 Millions of CVE, 27.5 Percent of GDP (4th Review-SR column); 75,727 CVE 26.9 Percent of GDP (Budget 2025 column) ... (table continues in source). - Primary balance: -1,938 Millions of CVE -0.7 Percent of GDP (4th Review-SR) ... 1,104 CVE 0.4 Percent of GDP (Budget 2025). - Overall balance: -8,177 Millions of CVE -2.9 Percent of GDP (4th Review-SR) ... -5,253 CVE -1.8 Percent of GDP (Budget 2025). - Financing needs and financing entries listed in the table (Millions of CVE and Percent of GDP). - Nominal GDP: 279,849; 281,711; 277,851; 296,751; 300,883; 297,596 (table columns). - Revenues and tax measures: - Non-cash transfer: CVE 4,911 million from ASA (state-owned air traffic control company) corresponds to non-cash acquisition of non-financial assets; excluded from staff program projections. - Revised program projections for other revenues are CVE 5,175 million higher than at the fourth review, mainly due to a non-recurrent second installment of the airport concession fee of CVE 4,961 million. - Tax-to-GDP ratio projected to increase by 0.9 percent of GDP in 2025: 0.5 percent of GDP from reducing customs exemptions, 0.4 percent of GDP from introduction of a tourism tax on arrivals. - Additional measures: reduction of CIT exemption on import component of large investments yields an additional 0.3 percentage points of GDP in 2026; proposed VAT legal framework changes expected to yield 0.2 percent of GDP in 2026. - Spending and financing adjustments: - Program envisages primary spending-to-GDP ratio 2 percentage points above fourth review projections; half explained by higher spending on goods and services tied to public investment pipeline background studies, half by expansion of transfers to municipalities linked to revenue growth. - Budget clause empowers Ministry of Finance to hold back goods and services expenditures to target program primary balance (0.4 percent of GDP). - Staff’s projected expenditure for 2025 are CVE 2,948 million lower than in draft budget when adjusted for non-cash transaction. - Net external financing in 2025 projected slightly higher than during fourth review due to postponement of IMF disbursements from end-2024 to 2025 and first disbursement from Global Gateway package by EU. - Net domestic financing projected to be 1.6 percentage points of GDP lower relative to 2024. - Continued capitalization to SOEs increases other debt-creating flows. - NEWCO accounts for 1,600 million CVE out of 2,200 million capitalization. - Public debt projections and sustainability: - Public debt (program basis) projected to decrease from 116.4 percent in 2023 to 111.8 percent at end-2024. - Public debt-to-GDP ratio projected to improve to 107.1 percent by end-2025. - DSA incorporates domestically guaranteed debt to SOEs and municipalities; Cabo Verde’s risk of external debt distress remains moderate, overall risk of debt distress remains high. - DSA assumes medium-term borrowing rates averaging 3.5 percent in the forecast horizon. - Authorities mentioned a target of around 70 percent of GDP by 2034 (based on current program coverage) could be an appropriate medium-term anchor for fiscal policy. *Source: IMF staff estimates and Cabo Verdean authorities (content as provided in the source PDF).* ### 10. The realization of the medium-term fiscal objectives is dependent on continued ### 10. The realization of the medium-term fiscal objectives is dependent on continued progress on revenue mobilization and expenditure reform. ### Medium-term fiscal stance and projections - For 2026, staff’s projected current primary expenditures are 0.8 percent of GDP lower than in 2025 to offset the unwinding of the 2025 airport concession fee on the structural primary balance. - In the medium-term: - Additional measures aimed at mitigating international tax avoidance, promoting a green transition, further reductions of tax exemptions in VAT, PIT, and custom tariffs would boost revenue. - Primary spending is projected to stabilize around 25.6 percent of GDP. - The wage bill is projected to be about 9.7 percent of GDP, in line with Small Island Developing State peers. - The medium-term steady-state primary balance is projected to stabilize at approximately 1.4 percent of GDP, representing an increase of 0.4 percent of GDP relative to the fourth review, to offset the debt-creating flows stemming from continued capitalization. - The World Bank’s is currently undertaking a Public Finance Review. - The medium-term fiscal path could be impacted by the knock-on effects of climate-related events on the economy. ### External borrowing program (Text Table 3: Cabo Verde: External Borrowing Program, 2024–25) - PPG External Debt Contracted or Guaranteed — Sources of debt financing: 96.9 57.8 134.5 83.2 - Concessional debt, of which: 96.9 57.8 135.5 83.2 - Multilateral debt: 72.7 43.3 102.2 62.8 - Bilateral debt: 24.2 14.5 33.3 20.4 - Non-concessional debt, of which: 0.0 0.0 0.0 0.0 - Semi-concessional debt 3/: (no values) - Commercial terms 4/: (no values) - Uses of debt financing: 96.9 57.8 134.5 83.2 - Infrastructure: 33.8 20.1 57.3 35.2 - Budget financing: 63.2 37.7 77.2 47.3 - Notes: - 1/ Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate. - The 2024 QPC on the present value of new debt is set according to the latest DSA (SR No 24/9). - 2/ Debt with a grant element that exceeds a minimum threshold. This minimum is typically 35 percent, but could be such established at a higher level. Some of the loans are packaged with grants, that the overall financing package meets the 35 percent concessionality threshold. - 3/ Debt with a positive grant element which does not meet the minimum grant element. - 4/ Debt without a positive grant element. For commercial debt, the present value would be defined as the nominal/face value. - Sources: Cabo Verdean Authorities; IMF Staff calculations - 2024 2025 ### B. Reduce Fiscal Risks from SOEs and Improve their Financial Management - SOEs continue to pose risks for the government’s reform program. - Recent reforms on SOE transparency have improved availability of information for decision making. - Unbundling of Electra (the energy SOE), with the support of the WB, is a good step towards wider structural reforms in the energy sector, in line with the direction supported by the RSF. - Challenges in reducing SOEs losses, particularly in the transport sector, exacerbate risks for the fiscal accounts. - The airline SOE has defaulted on bank loans, pushing up NPLs; some of those bad loans also carry a government guarantee. - The national airline uses resources that might more usefully be deployed to improve inter-island connectivity — a growth bottleneck. - Policy direction and actions: - Efforts to restructure or divest the SOE sector should be maintained. - Authorities have launched a process of privatization in airport logistics and potential concessions in other areas, e.g. ports and pharmaceutical (Text Table 5). - The new SOE law (enacted in April 2024) aims to clarify interactions between SOE commercial operations and government related policies. - Authorities should work on a clear strategy for domestic inter-island air transport, while also dealing with TACV, the loss-making SOE airline focused on international routes. - Air transport developments: - After the inter-island air transport concessionaire withdrew, the government launched a new SOE airline to maintain connectivity; it currently breaks even without straining the budget. - TACV, the SOE for international routes, remains unprofitable. - Entry of an international low-cost airline in the Cabo Verde market could provide competition on international flights and an opportunity to reconsider the best use of public finances to support connectivity; authorities are wary of becoming too dependent on low-cost providers. ### C. Modernize the Monetary Policy Framework and Improve Resilience of the Financial System - Monetary policy stance and reserve buffers: - The monetary policy framework is focused on safeguarding the peg and is being tightened to reverse the erosion of reserve buffers. - The conventional fixed peg exchange rate regime continues to provide a stable anchor for monetary policy, supported by adequate external buffers. - Although BCV started to increase the policy rate since 2023, the inverted interest rate differential with the ECB has led banks to place deposits abroad, undermining reserve accumulation. - The BCV has committed to continue raising the rates in the short term to close the interest rate differential. - Reserves are estimated to fall to the low end of the cover target range of the BCV in 2024 (5.1 months), from 5.9 months of imports in 2023. - Recommendation: continued decisive action from the BCV, including through forward guidance, to signal the commitment to closing the interest rate differential with the ECB in the near term. - Financial sector concentration and risks: - As of end-September 2024, the seven banks in the system held assets equivalent to 126.4 percent of GDP. - Two domestic systemically important banks jointly account for a large share in industry total assets and deposits. - The banking system appears to be resilient to liquidity risk in general, but high dependence on deposits from the social security agency (INPS) can create liquidity concerns depending on INPS behavior. - MCM is planning in early 2025 a TA mission on macroprudential issues. - Credit quality and NPLs: - Based on the latest stress tests and FSI data to September 2024, the banking system appears resilient to simple shocks but vulnerable to portfolio concentration and high exposure to the sovereign (domestic debt market, and loans to public and private companies with public guarantees) (Annex III). - NPLs have increased to 11 percent of total loans in Q3 2024, up from 8.3 percent in Q1, largely due to loss-making SOEs. - Some NPLs have public guarantees, which could lead to fiscal costs. - Recommendation: BCV should use supervisory tools and macroprudential measures to tackle NPLs as a first line of defense; BCV should update prudential provisioning guidelines to levels of jurisdictions in the region and best practices, in line with the IMF’s CD advice. - Excess liquidity and policy tools: - Cabo Verde's banking system currently has substantial excess liquidity. - Causes include: decrease in the minimum required reserves ratio, injection of additional long-term liquidity during the COVID-19 pandemic, and the lack of domestic lending opportunities. - Excess liquidity incentivizes banks to move assets abroad. - Recommendation: Gradually increasing reserve requirements towards pre-pandemic norms to help mop up existing excess liquidity can yield benefits: increase international reserves, strengthen financial stability structurally, and improve monetary policy transmission. - BCV may also consider carrying out open market operations more actively to better manage banks’ excess liquidity, while increasing the share of liquidity injections that it currently sterilizes. - Safeguards and reporting: - BCV continues to implement recommendations of the 2022 safeguards assessment. - Amendments to the Organic Law of the BCV to strengthen decision-making structure, autonomy, accountability, and transparency were submitted to parliament with a slight delay in September (SB end-July 2024); these amendments are expected to be discussed by Parliament in early 2025. - BCV remains committed to implementing outstanding safeguards recommendations, including full adoption of International Financial Reporting Standards for FY2024. - AML/CFT framework: - The current supervisory and regulatory framework relating to AML/CFT should be strengthened and priority given to address strategic AML/CFT deficiencies. - Measures introduced since the mutual evaluation report (MER) in May 2019 have not warranted technical compliance upgrades. - Following approval of the National Strategy for Preventing and Combating Money Laundering, Terrorist Financing, and the Proliferation of Weapons of Mass Destruction (ENCAVE) in April 2023, initiatives include: - AML/CFT and Supervisory Framework to financial institutions: - establishment of an AML/CFT team within the Department of Microprudential Supervision during 2024; - a proposal for an independent AML/CFT unit and inclusion of AML/CFT measures in BCV's 2025–2028 strategic plan; - capacity building; - partnerships with supervisory colleges and the AML/CFT Interministerial Commission. - Legal and Regulatory Developments: - strengthening laws to address ML/FT risks, including BCV's supervisory role over Virtual Asset Service Providers; - Notice No. 1/2024 mandates the prior registration of key functions, such as Compliance. - Authorities will prioritize supervisory activities for Designated Non-Financial Businesses and Professions (DNFBPs) based on risk assessments. ### Box 4 — Excess Liquidity and Monetary Policy in Cabo Verde (summary) - Monetary policy anchors and targets: - Fixed parity with the euro; inflation target of 2 percent. - BCV targets international reserves in the range of 5 to 5½ months of prospective imports. - Pandemic-era measures that increased liquidity: - Policy rate reduced by 125 basis points to 0.25 percent. - Minimum reserve requirements ratio reduced from 13 to 10 percent. - Overnight deposit rate reduced by 5 basis points to 0.05 percent. - Long-term lending instrument Operações Monetárias de Financiamento (OMF) for banks at 0.75 percent. - Call on banks to grant delayed payment of loans without implications on NPLs and provisioning (moratorium expired in 2023). - Transmission challenges: - Structural factors: very low turnover in the interbank market and limited development of the government securities market continue to hinder transmission. - Sterilization and open market operations: - Excess reserves remunerated at the deposit facility rate. - Main sterilization instruments: short-term (14 days) Títulos de Regularização Monetária (TRM) and long term (30 days and longer) Títulos de Intervenção Monetária (TIMs). - Historically BCV sterilized around 8-8.5 percent of liquidity injected through international reserves accumulation; BCV increased open market operations to 48 percent during 2024 to assist reserve accumulation and mop-up excess liquidity. - The BCV increased open market operations from CVE 6.5 billion to CVE 9.6 billion in October 2024. - Data indicators and charts referenced: BCV rates, Required Reserves Ratio and Excess Liquidity, Total OMF outstanding and maturities, Excess Liquidity and Credit to the Economy (figures not reproduced here). ### D. Reforms for Broad-Based Growth and Increased Climate Resilience - Structural reform priorities: - Five-year development strategy (PEDS II) priorities: access to finance and improving the business environment. - Continue reforms to improve the business environment, especially for SMEs, and facilitate private sector-led economic diversification. - Reduce high costs of finance, electricity, water, and transport. - Diversification channels: - Within tourism: move towards more integrated resort projects. - Promote alternative sectors: blue economy and digital economy. - RMs under the RSF facilitate an enabling environment for private climate finance, linking RSF and PEDS II priorities. - Social protection and vulnerable households: - Targeted cash transfers to the poorest have increased, funded from the Social Protection Fund (financed by the tourism tax and non-earmarked revenues). - Ministry of Family and Social Inclusion expanded coverage of the Unique Social Registry (USR) to 100 percent of poor and vulnerable households as identified based on the latest household budget survey. - Progress on RMs in support of the climate change agenda: - Completed RMs: - Ministry of Finance submitted to the Parliament the annual Fiscal Risk Statement (FRS) (RM2) in early October 2024 as a component of the Budget 2025 submission. The FRS includes a quantitative analysis of fiscal risks generated by climate change. - Substantial progress with delayed completion: - USR expanded to 100 percent of poor and vulnerable households; ability to offer inclusion to households in areas vulnerable to climate change awaits availability of vulnerability maps (RM7). - INGT has made progress in defining natural disaster risk and vulnerability maps; to date INGT has worked on 5 maps and expects to complete the process early next year; land use planning and construction code requirements are being amended to consider disaster risks and vulnerabilities for urban and rural development planning and for designing and construction infrastructure and buildings (RM8). - Slower progress: - BCV attended an online MCM training/webinar on developing a climate information architecture for banks, including a taxonomy; due to complexity and need for additional CD, BCV indicated this RM will be delayed to the next review; contracting a consultant to help develop the architecture, a publication of climate risk and opportunities, and disclosure guidelines to help banks submit internal roadmaps (RM9). MCM will provide CD in 2025 to review the consultant’s work. - Future RMs and data needs: - RM5 (electricity subsidy reforms): preliminary findings from an FAD mission indicate missing information needed to calculate cost-recovery tariff at required disaggregation, e.g., separate accounting data for electricity generation, electricity distribution, water desalination, and detailed data on subsidies provided to Electra. - RM6 (water subsidy reform): similar problems prevail in the water sector; multiple utilities across islands complicate cost-recovery tariff calculation; mission planned for January postponed to March to allow more time for required information. - Positive developments: missing analytical accounting information is being produced, improving prospects that RM5 and RM6 can be implemented albeit with delays; the unbundling of Electra in anticipation of potential privatization in 2H 2025 is providing impetus to produce missing analytical accounting. In the water sector there is prior work funded by LuxDev. *Source: IMF staff analysis and Cabo Verdean authorities as presented in the provided document.* ### 24. Modifications of conditionality. The authorities request a waiver for the non- ### 24. Modifications of conditionality. The authorities request a waiver for the non- ### Modifications of conditionality - Authorities request a waiver for the non-observance of the end-June 2024 PC on GIR based on corrective action—interest rates increase and forward guidance—taken by the BCV. - Authorities request a modification of the end-December 2024 PC on GIR to reflect the lower base. - Authorities request modification of the end-December QPCs on domestic financing and the NPV of new external debt (ceilings) in line with the revised financing assumptions for 2024 (see paragraph 8). - Slow progress with RM7, RM8 and RM9 with implementation delayed until the next review. ### Financing assurances and program financing - The Fund-supported program continues to be fully financed with firm commitments for the next 12 months, hence, until the end of the program. - Net external financing is lower than projected in the fourth review due to: - under-execution of capital expenditures, - the postponement of the IMF disbursement from 2024 to 2025, - revisions to the World Bank’s disbursement schedule. - Lower net external financing is offset by: - reduction of gross financing needs, - domestic financing supported by strong financial position of the domestic holders of government debt. - Additional financing in the last year of the ECF is provided through budget support from development partners and multinational development institutions, including the World Bank, the EU and the African Development Bank. ### Cabo Verde’s capacity to repay the Fund - Fund credit outstanding would peak at 380 percent of quota by 2025. - Credit outstanding would peak at about: - 4.1 percent of GDP by 2025, - 16.7 percent of gross international reserves by 2025, - 10 percent of exports by 2025. - Annual repayments to the Fund would peak at: - 1.1 percent of exports in 2029, - 1.7 percent of reserves in 2029, - almost 10 percent of PPG external debt service in 2029. ### Risks to the program - Risks assessed as moderate. - External shocks that may increase risks: - further global slowdown, - escalation of the wars in Ukraine and Gaza, - tighter global and regional financial conditions. - High risk of overall debt distress remains a concern. - If risks materialize, proactive adjustment of policies in consultation with Fund staff is helped by the authorities’ strong track record and ownership under the current Fund-supported programs. ### Data provision and capacity development (CD) - Data provision has been adequate for both surveillance and program monitoring. - Capacity development strategy is well aligned with the ECF-supported program and the RSF (Figure 6). - IMF CD has supported implementation of past IMF staff advice, with relatively good traction. - CD priorities: - revenue mobilization, - public financial management (including the climate dimension on budgeting and public investments), - central bank operations, - banking supervision, - financial stability, - macro statistics. ### Use of RSF resources - RSF disbursements would increase external financing by about CVE 0.7 billion in 2024 and 2.5 CVE billion in 2025. - The RSF substitutes more expensive domestic financing with cumulative estimated savings in debt service of 0.7 percent of GDP until 2029. - These savings will help build buffers and make Cabo Verde more resilient to climate-related shocks and create fiscal space to support critical climate-related public investment. - From the balance of payments standpoint, RSF disbursements increase international reserves by the disbursement amounts in 2024 and 2025, respectively. - An MoU between the MoF and BCV was signed which details the institutional arrangements. ### Staff appraisal — Growth, inflation, and external sector - Real growth is estimated at 6 percent in 2024 and is expected to be 5 percent in 2025. - Inflation is forecast at 1.5 percent, end-2024, and 2 percent in 2025, broadly in line with Euro-area inflation. - The broadly balanced current account deficit in 2024 is expected to widen to about 2.2 percent of GDP in 2025, as imports pick up. - The level of GIR is projected to remain within the interval followed by the BCV, and broadly stable over the medium term. - The economy remains vulnerable to external shocks impacting tourism activity, as well as climate risks. ### Staff appraisal — Fiscal policy and public investment - Fiscal performance in 2024 is strong. - Staff urges authorities to use any revenue overperformance and expenditure smoothing to improve on the 2025 primary deficit. - Forecast improvement in the 2024 primary balance is partially due to under execution of capital spending; staff urges authorities to improve investment execution in 2025. - Capital spending will support growth and the risk of overheating is minimal due to the high import content. - The 2025 budget gives the MoF authority to meet the program’s primary balance target for 2025 and smooth the medium-term fiscal adjustment path. - Medium-term improvement in the primary balance is dependent on domestic revenue mobilization measures and reforms. - Fiscal risks from SOEs and PPPs need to be closely monitored and mitigating measures adopted; delays in SOE reforms could undermine credibility of the authorities’ reform agenda and fiscal sustainability. ### Staff appraisal — Monetary policy and macroprudential measures - Monetary policy should continue the tightening cycle to protect the exchange rate peg and build reserve buffers. - Despite interest rate hikes since 2023, lower rates than the ECB have led banks to deposit funds abroad, reducing reserves. - Recommendations for BCV: - further increase its interest rate, - provide strong and clear forward guidance on the need to close the interest rate gap with the ECB. - BCV is considering strong macro-prudential actions to complement monetary policy, including reassessment of reserve requirements to better manage excess liquidity, large exposures, and non-performing loans while ensuring financial stability. ### Program performance and structural measures - Program performance has been strong. - All June 2024 QPCs and continuous PCs under the ECF were met, except for GIR, with corrective actions being taken. - All Indicative Targets (IT) to September were met, except the one on GIR for end-September. - One Structural Benchmark (SB) due end-June 2024 and two SBs due end-September 2024 were met. - The SB due end-July 2024 was implemented with a short-delay in September. - Climate-related RM2 under the RSF was completed. - RMs 7, 8 and 9 are proposed to be assessed at the next review due to the need for continued progress. ### Reforms and resilience - Reforms should continue to target productivity, growth, and resilience to shocks, including climate change. - The PEDS II strategy focuses on improving access to finance and the business environment. - The RSF supports the climate transition through reforms in the energy-water sector, including by strengthening infrastructure, reducing cost and encouraging private sector growth. - Social policies target poverty reduction, equity, and support for vulnerable groups. *Source: IMF staff report (Cabo Verde).* ### 35. Staff recommends the completion of the fifth review under the ECF and the second ### 1cpvea2025001-print-pdf - 35. Staff recommends the completion of the fifth review under the ECF and the second ### Program recommendation and conditionality - Staff recommends the completion of the fifth review under the ECF and the second review under the RSF arrangements. - Staff supports: - the request for a waiver for the nonobservance of the GIR QPC; - modifications to end-December 2024 QPCs on GIR, domestic financing, and NPV of new external debt; - the delayed implementation of RMs 7, 8 and 9 under the RSF arrangement. ### Recent economic developments and growth drivers - Economic growth has remained strong in 2024, reflecting: - strong arrivals in the tourism sector; - a continued recovery in the Services sector. - FDI and remittances helped support reserves despite bank outflows. - Headline inflation remains low. - Credit dynamics: - Credit to the government fell due to strong fiscal performance. - Credit-to-economy increased even with gradual phasing out of COVID-19 relief measures. - Credit-at-Risk has been increasing since 2022. - Nonperforming loans increased in Q3 2024, with concentration in transport, real estate and tourism sectors. ### External sector developments and outlook - Strong export performance and weaker capital goods imports are projected to narrow the current account deficit in 2024. - The financial account is expected to turn positive in 2024 due to strong banks’ deposit outflows. - Tourism: - Tourism arrivals have continued to increase and are estimated to remain above pre-pandemic levels. - Tourism receipts show a steady increase; tourism receipts constitute a significant share of total exports. - Remittances are estimated to stabilize in 2024, remaining an important source of foreign currency. - Reserve dynamics: - Large deposit outflows have led to a decline in the country’s reserve position. - Gross international reserves (end of period, € millions) listed in source: 595 626 686 743 646 715 763 837 894 970. ### Fiscal sector developments and budget credibility - Fiscal outcome in 2024 aligns with the program. - Revenue and expenditures: - Tax-to-GDP ratio slightly above 2023. - Expenditures are projected to increase at the margin. - Current expenditure increases due to expansion of goods and services and the wage bill. - Net other liabilities are projected to be broadly stable in 2024, constraining government support to SOEs. - Financing needs are projected to rise mostly due to unwinding of 2023 one-off airport concession fee. - Budget execution patterns (2021–23): - Fiscal deficits were significantly smaller than anticipated in the budget during 2021-23. - Grants consistently underperformed. - Current expenditures recorded a budget execution rate around 90 percent. - Capital spending shortfalls were the primary factor behind better-than-expected fiscal deficit performance during 2021-23. ### Monetary and financial sector policy and stability - Broad money increased at end-August 2024 due to increase of foreign assets. - Interest rate and central bank action: - The central bank started to adjust its policy rate, narrowing the interest differential with the ECB rates. - 6m T-bill rate, BCV policy rate, Bank Deposit Rate, Bank Lending Rate series shown in source figures. - International banking behavior: - Interest rate differential is leading to increasing bank deposits abroad. - Net foreign assets and net domestic assets movements shown in source figures. - Financial soundness: - Nonperforming loans to total loans rose in Q3 2024; provisions to nonperforming loans series provided. ### Capacity development (CD) and technical assistance - CD spending in Cabo Verde (CPV) is broadly in line with the AFR average but projected to rise. - CPV fares well compared to SDS peers; CD spending is in line with other RSF countries. - FAD is responsible for most CD delivery under core spending and revenue work streams. - Fund CD is supporting key program objectives in 2024. - CD spending by delivery department (FY25, USD millions) listed in source: FAD, 1.5; MCM, 0.4; STA, 0.2; ICDD, 0.1; LEG, 0.1. ### Key indicators, projections, and selected numeric highlights (from tables and figures) - Real GDP growth (selected series in table): 7.0 15.8 5.5 4.7 6.0 5.0 4.9 4.9 4.8 4.8 (annual entries as in source). - Consumer price index (annual average): 1.9 7.9 3.7 2.0 1.0 1.5 2.0 2.0 2.0 2.0. - Exports of goods and services percentages/series: 6.4 105.2 11.7 8.3 14.2 6.8 7.1 6.4 7.1 6.9. - Tourism-specific export series: -16.4 225.5 31.6 10.6 15.0 6.9 7.4 7.2 7.3 7.2. - External current account (including official transfers, percent of GDP): -12.1 -3.5 -2.2 -5.2 -0.3 -2.2 -2.4 -2.5 -2.5 -2.5. - Present value of PPG external debt percent of GDP (selected): ...57.2 53.5 ...54.2 51.3 50.7 48.6 45.5 42.6 40.3 38.4. - Total nominal government debt (percent of GDP series): 148.0 126.8 116.4 110.0 111.8 107.1 102.0 96.4 91.3 86.5. - Gross international reserves (end of period, € millions) in Table 2 memorandum: 595 626 686 743 646 715 763 837 894 970. - Balance of payments (Table 2, selected rows in Millions of Euros): - Current account (Millions of Euros): -210 -76 -51 -132 -7 -59 -69 -77 -83 -87. - Trade balance: -602 -744 -824 -980 -834 -932 -999 -1071 -1145 -1221. - Exports, f.o.b.: 151 269 238 290 277 298 320 344 369 394. - Imports, f.o.b.: 753 1013 1062 1270 1111 1230 1319 1415 1514 1614. - Services (net): 51 307 412 459 487 512 538 576 608 650. - Tourism receipts (Millions of Euros, series in figures). - Table 6 (Quantitative Performance Criteria and Indicative Targets, selected entries): - Primary balance, floor: -1849 1069 met -2417.4 10670.0 met -2740.6 3607.1 met -3063.97 (values and statuses as shown). - Tax revenue, floor: 8088 12855 met 21029 27171 met 37501.4 41847.2 met 53973.7 14808 (as in source). - Gross international reserves (in millions of euros), floor entries: 671 706 met 693 666 not met 716 647 not met 743 646 745 659 (as in source). - PV of new external debt, ceiling (in millions of US Dollars): 2417 met 3727 met 95.4 32.6 met 125.5 5819 (as in source). - Table 2 memorandum: Months of next year's imports of goods and services series: 5.7 5.7 5.9 5.6 5.1 5.2 5.2 5.3 5.3 5.4. ### RSF Reform Measures Matrix — status and timing (selected reforms) - RM1 (Climate council/body establishment) - Status: Completed. Cabinet approved Resolution no 38/2024; published in Official Gazette on May 10, 2024. - Development partner: LuxDev provided TA on climate governance. - Timing: End-April 2024; 4th ECF Review. - RM2 (Fiscal Risk Statement: quantitative analysis of climate risks) - Status: Completed. Fiscal Risk Statement published alongside draft 2025 budget. - IMF CD: C-PIMA; FAD delivered TA in July 2024. - Timing: RM completed end-September 2024; 5th ECF Review. - RM3 (PPP legal framework amendments to reflect climate requirements) - Status: Completed. Changes approved by Cabinet in April and published in Official Gazette on May 8, 2024 (Decreto-lei 21/2024). - IMF CD input: FAD/LEG CD in March. - Timing: End-April 2024; 4th ECF Review. - RM4 (National climate finance mobilization strategy and project pipeline) - Status: On track. Strategy largely complete and presented at COP 29; to be published in mid-December. Pipeline work ongoing, expected early 2025. - Development partner: LuxDev providing TA; follow up FADM2 support in first half of 2025. - Timing: End-April 2025; 6th ECF Review. - RM5 (Electricity cost-recovery tariff methodology and regulations) - Status: On track. Cooperation with international partners advanced; ongoing analytical work and business plans for EPEC and EDEC. - IMF CD input: CPD FADEP support; FAD technical assistance. - Development partners: WB energy projects, LuxDev. - Timing: End-April 2025; 6th ECF Review. - RM6 (Water sector cost-recovery tariff methodology and regulations) - Status: Authorities are setting out investment plans; scope by test date likely narrows to Santiago Island. - IMF CD input: CPD FAD support in January 2025. - Development partner: LuxDev supporting tariff reforms. - Timing: End-April 2025; 6th ECF Review. - RM7 (Unique Social Registry expansion) - Status: Delayed. USR expanded and covers 100 percent of poor and vulnerable households; offering inclusion to households in climate vulnerable areas dependent on RM8. - Development partner: World Bank; URS web page: www.csu.cv. - Timing: WB End-November 2024; 5th ECF Review. - RM8 (Natural disaster risk and vulnerability maps; land use and construction code amendments) - Status: Delayed. Authorities started work; INGC working on defining maps which also supports RM7. - Timing: End-November 2024; 5th ECF Review. - RM9 (BCV climate information architecture for banks: taxonomy and disclosure guidelines) - Status: Delayed. BCV engaged external consultancy; MCM delivered online presentation and will support review and bilateral CD. - Timing: TBC; End-November 2024; 5th ECF Review. *Source: Cabo Verdean authorities; and IMF staff estimates and projections (excerpts and figures as presented in the supplied content).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Overview and Methodology - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. - The relative likelihood is the staff’s subjective assessment of the risks surrounding the 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 conflicts - Relative Likelihood: High - Impact if Realized: High - Escalation or spread of the conflict in Gaza and Israel, Russia’s war in Ukraine, and/or other regional conflicts or terrorism disrupt trade (e.g., energy, food, tourism, supply chains), remittances, FDI and financial flows, payment systems, and increase refugee flows. - 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. - A shift in tourism to Cabo Verde could also mitigate the impact. - Global growth slowdown - Relative Likelihood: Medium - Impact if Realized: Medium - Growth slowdown in major economies, including due to supply disruptions, tight monetary policy, rising corporate bankruptcies, or a deeper-than-envisaged real estate sector contraction, with adverse spillovers through trade and financial channels, triggering sudden stops. - 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 - Supply and demand fluctuations (e.g., due to conflicts, export restrictions, OPEC+ decisions, and green transition) cause recurrent commodity price volatility, external and fiscal pressures and food insecurity in EMDEs, cross-border spillovers, and social and economic instability. - 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. - Increase government’s targeted supports to vulnerable groups. ### Structural Risks - Deepening geoeconomic fragmentation - Relative Likelihood: High - Impact if Realized: High - Broader conflicts, inward-oriented policies, and weakened international cooperation result in a less efficient configuration of trade and FDI, supply disruptions, protectionism, policy uncertainty, technological and payments systems fragmentation, rising shipping and input costs, financial instability, a fracturing of international monetary system, and lower growth. - Cabo Verde is an open economy, highly dependent on imports (food, intermediates, and fuel), remittances and tourism. Hence any disruption on each of these areas is bound to deeply affect economic activity. - 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. - Extreme climate events - Relative Likelihood: Medium - Impact if Realized: Medium/High - Extreme climate events driven by rising temperatures cause loss of life, damage to infrastructure, food insecurity, supply disruptions, lower growth, and financial instability. A disorderly transition to net-zero emissions and regulatory uncertainty lead to stranded assets and low investment. - 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 - Less ambitious and slower fiscal consolidation efforts and delayed SOEs reforms as the economy returns to normal. - 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 structural reforms implementation, particularly in the public enterprises sector. - Delays in advancing the structural reform agenda would hinder competitiveness, potential GDP growth and employment. - Policy Response: - Follow through with SOEs reform plans and accelerate other structural reforms as soon as possible, to improve the business environment, reduce the State’s role in productive activities and enhance growth potential. *Annex I. Risk Assessment Matrix (as presented in the source).* ### 1. Cabo Verde's economy continues to grow strongly. Growth in 2024 is projected at 6 ### Cabo Verde's economy continues to grow strongly. Growth in 2024 is projected at 6 percent ### Economic outlook and external sector - Real GDP growth: - 2024 projected at 6 percent. - 2025 projected at 5 percent and moving towards potential growth over the medium-term. - Inflation: - Eased in 2024 and is expected to stabilize at below 2 percent in 2025. - Reserves and external accounts: - Reserves were at €666 million (5 months of imports) in June-2024, against a target of €693 million. - Current account deficit expected to shrink to 0.3 percent in 2024 and to stabilize at around 2.5 percent over the medium term. - Drivers and drags: - Growth driven by strong tourism receipts and private consumption, partially offset by a drag from investment. ### Fiscal position, revenues, and public finances - 2024 fiscal developments: - Tax revenues increased through end-September 2024 by 13 percent y-o-y. - Primary expenditure grew by 12.4 percent y-o-y. - Primary balance over January-August 2024 registered a surplus of CVE 3,292 million. - Budget execution and financing: - Primary deficit projected at 0.1 percent of GDP for 2024 (improvement from 0.6 percent of GDP deficit in the fourth review). - Net external financing for 2025 slightly higher than earlier estimates due to delayed ECF, RSF, and EU disbursements. - Net domestic financing for 2025 will be 1.7 percent of GDP lower than in 2024. - Government drawing on deposits to cover higher financing needs in the draft budget. - 2025 budget and measures: - Draft 2025 budget submitted in October aligned with program parameters and implies a surplus in the primary balance. - Clause empowering the Ministry of Finance to restrict goods and services expenditures to meet program primary balance of 0.4 percent of GDP. - Targeting a primary balance of CVE 1,092 million for 2025. - Revenue mobilization measures and yields: - Tax-to-GDP ratio anticipated to rise by 0.9 percent of GDP in 2025: - 0.5 percent of GDP from reduction of customs exemptions. - 0.4 percent of GDP from introduction of a tourism tax on international arrivals. - New law reduces the CIT exemption on the import component of large investments (effective 2026), projected to generate an additional 0.3 percent of GDP. - Proposed VAT legal framework changes with an expected yield of 0.2 percent of GDP in 2026. - Medium-term fiscal targets and projections: - Primary fiscal balance to continue improving to a surplus of 1.3 percent by 2026. - Overall deficit to shrink from 2.4 in 2024 to 1.8 percent by program end and 0.3 percent by 2028. - Public debt projected to drop from 116.4 percent of GDP in 2023 to 111.8 percent at end-2024, and to 107.1 percent by end-2025. - Public debt projected at 91.4 percent of GDP by 2028. ### Public investment, SOEs, and public debt management - Public investment and efficiency: - Government committed to enhancing public investment efficiency with IMF TA recommendations including redefining thresholds, pre-screening of project ideas, multi-criteria prioritization, and a pre-implementation checklist. - Capital spending to be tightly focused and social programs reviewed to protect the most vulnerable. - SOEs: - SOE losses, particularly in transport, remain a concern; national airline difficulties have increased NPLs and could drain fiscal resources. - Privatization and restructuring efforts underway: privatizing airport logistics, exploring concessions (ports, pharmaceuticals), unbundling Electra. - New SOE law (April 2024) clarifies SOE-government relationships. - TACV expected to be put on a sound financing footing by 2026. - Debt relief and legal measures: - Memorandum with Portugal on debt-for-climate swaps. - Updated debt legislation aligning with the 2018 review to support internal DSA. - Revised guarantees law establishes a fund financed by beneficiaries to mitigate noncompliance risks. - ICD provided CD and training in H2 2024 to aid future budget preparation. ### Monetary policy, reserves, and financial sector resilience - Monetary policy actions and objectives: - BCV raised policy rate in November and December 2024 to 2.25 percent, committing to continue narrowing the interest rate differential with the ECB policy rate in the near term to protect reserves. - Policy tightened to safeguard the peg and build reserves; fixed peg remains stable. - Real ex ante policy rate turned positive during early 2024 as inflation decelerated. - Monetary aggregates (as of September-2024): - M2 grew at 7.9 percent (y-o-y). - Total deposits grew by 7.6 percent. - Credit to the economy grew by 7.1 percent. - Reserves trajectory: - Reserves expected to drop to 5.1 months of imports by 2024 without decisive actions. - Banking sector risks and measures: - NPLs rose to 11 percent in Q3 2024, up from 8.3 percent in Q1 2024, mainly due to loss-making SOEs. - System resilient to simple shocks but vulnerable to portfolio concentration and high sovereign exposure. - BCV to use supervisory tools, macroprudential measures, and update prudential provisioning guidelines to align with regional standards and IMF recommendations. - Excess liquidity and policy responses: - Banking system has substantial excess liquidity, partly due to lower reserve requirements and long-term liquidity injections during COVID-19. - Excess liquidity incentivizes banks to move assets abroad. - Responses include increasing reserve requirements towards pre-pandemic norms, more active open market operations, and increasing sterilized liquidity injections’ share. - Financial sector modernization and supervision: - Strengthening AML/CFT framework and supervisory capacity: - Establishment of an AML/CFT team within the Department of Microprudential Supervision in 2024. - Proposal for independent AML/CFT unit, inclusion in BCV's 2025–2028 strategic plan, and staff reinforcement. - Capacity building, sectoral risk assessments, and partnerships with supervisory colleges and the AML/CFT Interministerial Commission. - Legal and regulatory developments including supervisory role over Virtual Asset Service Providers, Notice No. 1/2024 mandating prior registration of key functions, and institutional strengthening of law enforcement and intelligence entities. - Plans to improve stress test frequency, include climate risks by 2025, strengthen bank resolution regime, and amend BCV Organic Law to improve autonomy and transparency. - BCV aligning monetary and financial statistics with IMF standards using the 2016 IMF Monetary and Financial Statistics Manual; improvements to credit data classification using INE’s classification. ### Structural reforms, social protection, and climate strategy (ECF- and RSF-supported) - PEDS II priorities: - Focus on inclusive tourism, air transport hub, modern public administration, digital innovation, and a blue economy zone. - Supports wave energy, desalination, and diaspora investment; backed by tax reforms and compliance measures in the 2025 budget. - Private sector and diversification: - Reforms to improve access to finance, business environment, and reduce high costs of finance, electricity, water, and transport. - Diversification toward integrated resort projects, blue economy, digital economy, industry, and agriculture using desalinated water. - Business environment and land: - Streamlining legal procedures, reducing waiting times, improving judicial connections, and digitalizing information for land titling to resolve ownership delays. - Social protection: - Targeted cash transfers increased and funded from the Social Protection Fund (financed by the tourism tax and non-earmarked revenues). - Unique Social Registry (USR) expanded to 100 percent of poor and vulnerable households. - Program protects social safety net spending and expands support for vulnerable families, including job market training. - Climate policy and RSF support: - NDC target: 18 percent reduction in GHG emissions by 2030 and net zero by 2050. - RSF supports: (i) strengthening climate governance, (ii) improving resilience, (iii) enhancing energy efficiency, (iv) promoting water sustainability, (v) building financial sector resilience to climate change. - Progress on RSF RMs under the 2nd Review: - Fiscal Risk Statement (RM2) submitted in early October 2024, includes quantitative analysis of fiscal risks from climate change. - USR expanded to 100 percent of poor and vulnerable households; INGT working on vulnerability maps (5 maps to date, action expected to be completed by end-year). - Land use planning and construction code requirements being amended to consider disaster risks and vulnerabilities (RM8). - BCV attended MCM training on developing a climate information architecture; BCV to contract a consultant and has delayed RM9 to the next review pending additional CD in 2025. ### Risks and challenges - External and internal shocks: - Risks include global conflicts, economic slowdowns, energy shocks, climate impacts (droughts, rising sea levels) that threaten infrastructure and tourism. - Upside risks include stronger trading partner growth, structural reforms, and better inter-island connectivity. - Debt and fiscal risks: - High debt distress risk remains; reliance on concessional financing and fiscal risks from slow SOE reforms. - Overall risk of debt distress remains high despite moderate external debt distress risk. - Financial stability concerns: - Sovereign exposure, high NPLs, and concentration of credit and deposits in banks. *IMF staff report excerpt.* ### 31. Work on the remaining RSF measures is ongoing. ### 1cpvea2025001-print-pdf - 31. Work on the remaining RSF measures is ongoing. ### Progress on Remaining RSF Reform Measures (RM4–RM6 and related) - RM4 (Climate finance mobilization) - Developed a Strategic Plan for Climate Finance mobilization with support from LuxDev that "comprehensively identifies the financing instruments to unlock climate finance sources"; presented at COP 29 in November 2024. - Work to develop and publish a pipeline of appraised public capital projects, including climate-related projects, as part of the budget process is ongoing (RM4, April-2025). - Status note in matrix: "On track. The climate finance strategy is largely complete and presented at COP 29. It will be published in mid-December. Work on the pipeline of projects is ongoing work and expected to be complete in early 2025." - Development partner role: "LuxDev is providing TA to formulate a climate finance strategy." Timing: "End-April 2025; 6th ECF Review." - RM5 (Energy sector cost recovery and tariff adjustments) - Objectives: (i) determine the cost-recovery rate for provision of electricity (fully reflecting operational and capital cost); (ii) identify any discrepancy between existing tariff and the cost-recovery rate; (iii) undertake a distributional impact assessment; (iv) publish and adopt regulations establishing a methodology for adjusting electricity tariffs to the identified cost-recovery rate to be applied by the regulator (achieving full cost recovery) by the test date, with transparent periodic adjustments. - Technical assistance and cooperation: - Working with the World Bank on unbundling of the energy SOE. - LuxDev advanced reforms to determine cost-recovery rates and identify tariff discrepancies; FAD IMF to provide CD in December 2024 for distributional impact assessment. - Authorities preparing business plans for new business units (EPEC and EDEC) which should include information needed to assess cost recovery tariffs. - Status and timing: "On track." Timing: "End-April 2025; 6th ECF Review." - RM6 (Water sector cost recovery and sustainability) - Objectives: (i) determine the cost-recovery rate for provision of water (fully reflecting operational and capital cost); (ii) identify discrepancy between existing tariff and the cost-recovery rate; (iii) undertake a distributional impact assessment; (iv) publish and adopt regulations to adjust water tariffs to cost-recovery rate to be applied by the regulator (achieving full cost recovery) by the test date, with transparent periodic adjustments, and/or finance infrastructure investment transparently from the budget to ensure sustainability of the water sector. - Technical assistance and cooperation: - Collaboration with LuxDev on tariff reform; FAD IMF support for tariff review and distributional impact assessment in January 2025. - Authorities are setting out investment plans for the water sector. - Scope likely to narrow to Santiago Island by the test date due to diversity of water business and management models across islands. - Status and timing: Authorities are progressing; Timing: "End-April 2025; 6th ECF Review." ### Related RSF Measures and Cross-cutting Actions (RM1–RM3, RM7–RM9) - RM1: Established council/body for coordinating climate change policy planning and DRM under Heads of Government; Cabinet approved Resolution no 38/2024 on May 7; published May 10, 2024. Development partner: LuxDev provided TA. Timing: "End-April 2024; 4th ECF Review." Status: Completed. - RM2: Ministry of Finance conducted and published quantitative analysis of fiscal risks generated by climate change in the annual Fiscal Risk Statement. IMF CD from FAD delivered July 2024. Status: Completed. Timing: "End-September 2024; 5th ECF Review." - RM3: Amendments to PPP legal framework and publication of a manual integrating climate requirements throughout PPP lifecycle; FAD/LEG CD in March supported amendments. Changes approved by Cabinet in April and published May 8, 2024 (Decreto-lei 21/2024). Timing: "End-April 2024; 4th ECF Review." Status: Completed. - RM7: Expand Unique Social Registry (USR) coverage to 100 percent of poor and vulnerable households and offer inclusion to 100 percent of households in climate vulnerable areas. Status: "Delayed. The USR has been expanded and covers 100 percent of poor and vulnerable households. Work on offering inclusion to households in climate vulnerable areas is dependent on RM8." Timing: "End-November 2024; 5th ECF Review." Development partner: World Bank. - RM8: INGT or new unit/council for climate change management and DRM to develop and disseminate natural disaster risk and vulnerability maps; amend land use planning and construction code requirements to consider disaster risks. Status: "Delayed. The authorities started working on this RM and using own resources. INGC is working on defining the natural disaster and vulnerability maps, which also supports RM7." Timing: "End-November 2024; 5th ECF Review." - RM9: BCV to develop climate information architecture for banks (adopt taxonomy and publish disclosure guidelines) so banks submit internal roadmaps within six months of effective date and progress reports every six months. Status: "Delayed. BCV engaged an external consultancy. MCM delivered an online presentation to BCV and will support by meeting the external consultant and providing bilateral CD." Timing: "TBC End-November 2024; 5th ECF Review." ### Financing and Program Monitoring - Program monitoring architecture: - "The program will be closely monitored through the proposed quantitative performance criteria, indicative targets, and structural benchmarks (Table 1 and 2)." - The Technical Memorandum of Understanding (TMU) describes definitions and data provision requirements. - "The sixth program review is scheduled to be completed as of March 2025 (based on end-December 2024 test date)." - Authorities requested: - A waiver for non-observance of the end-June 2024 QPC on GIR. - Modifications for end-December 2024: i) the QPC on GIR to reflect the lower base; and ii) the QPC on domestic financing and the NPV of new external debt in line with revised financing assumptions for 2024. - "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. "The completion of the RM7, RM8 and RM9 will be completed and reviewed by the next test date." ### Key operational definitions and reporting requirements (TMU highlights) - 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." - Central government coverage: - Central government includes all units of budgetary central government and extrabudgetary entities; excludes local government (municipalities), social security funds, and public corporations. - Primary balance: - Defined as total tax and non-tax revenues and grants minus primary expenditure; measured as cumulative flow over the calendar year. - Revenues recorded when funds are transferred to a government revenue account; tax revenues recorded net of tax refunds. - Central government primary expenditure recorded on a cash basis and covers recurrent and capital expenditure. - "The floor of the primary balance will be adjusted upward (downward) by the surplus (shortfall) in disbursements of the grants to the baseline projection." - Tax revenue floor: - Tax revenues exclude asset sales, grants, and non-tax revenues; floor measured as cumulative flow from beginning of the calendar year. - Net Other Liabilities: - Defined as sum of loans to SOEs and municipalities (onlending) and capitalization; onlending and capitalization reflected with inverted signs in total Net Other Liabilities. - Net Domestic Financing (NDF) ceiling: - NDF defined as (i) net position vis-à-vis central bank and commercial banks and (ii) issuance (net of redemptions) of securities to non-bank entities. - "NDF at end-December 2023, end-June 2024, and end-December 2024 (PCs) must be equal to or less than the amounts indicated in Table 1 (of QPCs) attached to the MEFP." - Adjustments to NDF ceiling tied to deviations in external budgetary assistance (Table 3) and privatization proceeds (Table 4). - Reporting frequency and lags: - DNP of the Ministry of Finance to provide data monthly with a lag of no more than six weeks from end-of-period for primary balance and tax revenue monitoring. - For NDF monitoring, DNP to provide data quarterly with a lag of no more than six weeks from end-of-period; DNP and BCV to provide data monthly with same six-week lag for net position to banking system. *Source: Excerpts from the Cabo Verde MEFP RSF reform measures and Technical Memorandum of Understanding as presented in the chapter text.* ### 15. As part of the program, the government will not accumulate any new domestic ### 1cpvea2025001-print-pdf - 15. As part of the program, the government will not accumulate any new domestic ### Domestic payments arrears (program rules and monitoring) - The government will not accumulate any new domestic payments arrears; monitored through monthly execution of the cash-flow plan and corresponding release of budget appropriations. - Definition for programming purposes: - A domestic payment obligation to suppliers is in arrears if not paid within the normal grace period of 60 days. - For government salaries and debt service the normal grace period is 30 days. - Exceptions: periods specified by the budget law or contractually agreed with the supplier after verified delivery, or when the amount or timing of payment is subject to good faith negotiations between the government and the creditor. - Reporting requirement: - The DNP of the Ministry of Finance will submit on a quarterly basis a detailed table of the stock of domestic payments arrears, including accumulation, payment, rescheduling and write-off during the quarter. - Data to be provided within six weeks after the end of the quarter. ### Ceiling on the PV of New External Concessional Debt (central government) - Ceiling applies to the present value (PV) of new external debt contracted or guaranteed by the public sector with original maturities of one year or more, and 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 (in PV terms) applies if deviations are prompted by a change in financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees). The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed. - Coverage: external public debt (long-term, medium-term, and short-term) defined as debt to nonresidents contracted or guaranteed by the central government, including external debt of official sector entities and SOEs guaranteed by the central government. - Definition of debt: 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): - “Debt” means a current liability created under a contractual arrangement by provision of value in the form of assets (including currency) or services requiring future payments in assets or services to discharge principal and/or interest. - Primary forms listed: - (i) Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - (ii) Suppliers’ credits (deferral of payments after delivery). - (iii) Leases (debt equals the present value at lease inception of all lease payments expected during the agreement excluding payments for operation, repair, or maintenance). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Concessional external debt: definitions, calculation, and exclusions - Ceilings on medium- and long-term, and on short-term concessional external debt are quantitative targets. - Coverage includes budget loans, projects and program loans, and on-lending loans to SOEs in line with the fiscal program. - Concessional debt definition for program purpose: - A debt is concessional if it includes a grant element of at least 35 percent. - Grant element = (nominal value − present value) / nominal value, expressed as a percentage of nominal value. - PV of debt at contracting calculated by discounting the future stream of payments of debt service due on the debt. - For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. - Discount rate: unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). - Exclusions: - Debt rescheduling and debt reorganization are excluded from limits on concessional external debt. - New concessional external debt excludes normal short-term (less than one year) import-related financing. ### PV calculation for variable-rate debts and program reference rates - For variable interest rates structured as benchmark plus fixed spread: - PV calculated using a program reference rate plus the fixed spread (in basis points) specified in the contract. - Program reference rate for the six-month USD LIBOR is 2.699 percent and will remain fixed for the duration of the program. - Spread of six-month Euro LIBOR over six-month USD LIBOR is -168 basis points. - Spread of six-month GBP LIBOR over six-month USD LIBOR is -80 basis points. - For currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is 100 basis points. - If the variable rate is linked to a benchmark other than 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. - TMU can be updated to reflect benchmark replacements (SOFR, SONIA, EURIBOR, TONAR) prior to LIBOR phase-out once operationally feasible. - Footnote: “The calculation of concessionality take into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.” ### Reporting requirements for external debt - Government to consult with Fund staff before assuming liabilities when uncertain whether an instrument falls under the quantitative target. - Details of all new external debt (including government guarantees), indicating terms and creditors, to be provided quarterly within six weeks of the end of each quarter. ### Non-concessional external debt (central government) - Ceilings on medium- and long-term, and on short-term non-concessional external debt are quantitative targets. - Zero ceiling on non-concessional external debt is on a continuous basis. - Non-concessional debt defined as grant element less than 35 percent; PV calculation and discount rate same as for concessional debt (unified discount rate of 5 percent). - Exclusions: - Debt rescheduling and debt reorganization excluded from limits. - 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: same consultation and quarterly reporting within six weeks of the end of each quarter. ### Gross International Reserves (GIR) of the Central Bank (quantitative target) - Floor on the stock of GIR of the BCV is a quantitative target. - GIR definition includes 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 adjuster calculations, 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 - Government will not accumulate any new external payments arrears; a continuous target under the program. Monitored through monthly cash-flow execution and 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 requirements: - Data on (i) debt-service payments; and (ii) external arrears accumulation and payments transmitted quarterly by the DNP within six weeks of the end of each quarter. - The government will inform Fund staff immediately of any accumulation of external arrears. ### Memorandum item: Floor on central government social spending - Indicative floor applies only to expenditures 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 items) - Tariff design: - 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. - Climate vulnerability information under RM 8: - Must cover: (i) maps on vulnerability to sea-level rise projection based on identified climate scenarios with full coverage of territory; (ii) climate vulnerability maps for the seven (seven out of 22) most populated and/or most climate vulnerable municipalities; and (iii) 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 information from vulnerability maps 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 on exports and imports (volume and prices) compiled by the Director of Customs and the BCV transmitted quarterly within five weeks after the end of each quarter. - Preliminary quarterly balance of payments compiled by the BCV forwarded within six weeks after the end of each quarter. - SOE and related data: - 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). - Specified reform targets and assessment criteria: - Pre-announce a schedule for TIM and TRM auctions reform target: assessed as achieved when pre-announcements are posted on the central bank website. - Introduce a composite indicator of economic activity: assessed as achieved when the central bank has released the composite indicator. - Carry out a comprehensive study of loan losses and provisions at expiration of the credit moratorium: assessed as achieved when the study is completed and released. - Develop a common framework for resolution of crisis-related NPLs: assessed as achieved when the common framework is complete and released (being developed jointly by the BCV and the World Bank). - Construct a Compliance Risk Management (CRM) system to optimize tax revenue collection: assessed as achieved when the MOF provides staff with a copy of methodology. - Increase frequency of stress testing to twice per year: assessed as achieved when the central bank provides findings of the second annual stress test. - Develop and publish an action plan to reduce tax expenditures: assessed as achieved when MOF provides staff a copy of the approved action plan. - Implement action plan on tax expenditures in the 2025 budget: assessed as achieved when MOF provides staff a copy of the approved 2025 budget with specification of the actions and impacts. - Publish in 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 (summary findings) - Joint Bank-Fund Debt Sustainability Analysis: - 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 observations: - Cabo Verde's external debt risk remains moderate consistent with the January 2024 DSA, while overall risk remains high. - Public sector coverage expanded to include the stock of uncalled domestically guaranteed debt to loss-making SOEs and municipalities. - Detailed risk rating for external debt distress shows limited room to absorb shocks. - Present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP 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 thresholds under the baseline mainly due to the significantly concessional characteristics of Cabo Verde’s external debt. - The PV of total public debt-to-GDP is projected to breach the threshold during 2024–2029 under the baseline scenario — a longer period relative to previous DSA — due to inclusion of the stock of uncalled domestically guaranteed debt to SOEs; breaches occur under stress tests over the forecast period. - Conditions for sustainability: - External and overall debt outlook assessed sustainable conditional on assumptions including steady economic growth around potential, consistent fiscal consolidation in line with the ECF program, and structural reforms, especially related to SOEs. - Recommendations: enhance SOE performance to reduce fiscal risks; prudent borrowing policies favoring concessional external loans; strengthened debt management; measures to enhance functioning of government securities market; progress in export and output diversification. *Prepared by the Staff of the International Monetary Fund and the International Development Association (December 18, 2024).* ### 1. The debt coverage in this DSA comprises debt owed by the central government ### 1cpvea2025001-print-pdf - 1. The debt coverage in this DSA comprises debt owed by the central government and certain government guarantees ### Debt coverage and DSA perimeter - The debt coverage in this DSA comprises debt owed by the central government and certain government guarantees. - Coverage of the public sector expanded to include the stock of uncalled domestically guaranteed debt to loss-making SOEs: 8 percent of GDP at end-2023. - Coverage expanded to include municipalities: 0.2 percent of GDP at end-2023. - Government guarantees on SOEs’ external borrowing were already included in the baseline stock of debt: 0.7 percent of GDP at end-2023. - Consistent with the fiscal accounts, social security funds and local governments are excluded from the DSA. - Coverage of extra budgetary funds (EBFs) is focused on government support to SOEs through on-lending and capitalization. - External debt is defined on a residency basis. - Expansion of the perimeter was done from 2015 onwards. - In line with Appendix 3 of the LIC-DSA guidelines, guaranteed debt to the national air traffic control company (Aeroportos e Segurança Aérea, ASA), equivalent to 0.6 percent of GDP at end-2023, has been excluded from DSA perimeter on the basis that the company is not considered a source of fiscal risk to the central government. ### Contingent liability design and stress tests - The contingent liability default stress test is modified to reflect inclusion of domestically guaranteed debt of SOEs in the DSA perimeter. - Default shock assumptions and adjustments: - Default shock of 0 percent of GDP for components of general government not captured in the baseline stock of debt is kept at the default level consistent with the size of publicly guaranteed domestic debt of local governments. - Social security fund (INPS) exclusion is not adjusted because the INPS financial position is strong and fiscal risk is minimal. - Default shock for SOEs’ debt adjusted to 2 percent of GDP after incorporation of domestically guaranteed debt to SOEs in the DSA perimeter. - Tailored contingent liability shock derivation: starting point tailored shock from last DSA of 28.2 percent of GDP; subtract stock domestically guaranteed debt to SOEs 8.6 percent of GDP as of end-2023 and on-lending from the central government 9.1 percent of GDP as of end-2023, yielding a tailored contingent liability shock of 10.5 percent of GDP. - Default shock of 1.2 percent of GDP for public private partnerships (PPPs) is kept. - Financial sector shock: default minimum value of 5 percent of GDP for the financial market shock retained as appropriate. ### SOE risk assessment, governance, and transparency reforms - Ongoing enhancements in SOE risk assessment and fiscal transparency include: - Implementation of the IMF’s SOE Health Check Tool; UASE strengthened analysis and assessment of fiscal risks from SOEs (latest report from Q4-2023). - Provision of consolidated data on financial transactions between the government, individual SOEs, and the sector to improve transparency and fiscal risk assessments. - Improvements to annual reports on contingent liabilities and SOE performance; introduction of quarterly SOE performance reports. - Adoption and publication of a comprehensive ownership policy for SOE portfolio management. - Revision of the overarching State Enterprise Sector Law (Lei do Sector Público Empresarial do Estado), currently under discussion at the National Assembly. - Creation of PARPÚBLICA to manage the state’s corporate investments and IMOPÚBLICA to manage the state's immovable property. - Initiatives to increase public information such as the Portal da Transparência and the SOE Manager platform. - SOE Manager platform details: - Digitized ICT tool and database to capture data directly and in real-time from SOEs. - Automatically generates aggregate performance information and dashboards for UASE, facilitating annual aggregate SOE portfolio and quarterly performance reports. - Could help anticipate potential SOE performance challenges more proactively and inform fiscal risk analysis. - World Bank support: - Efforts to expand debt coverage supported by the World Bank through the Performance and Policy Actions under the Sustainable Development Financing Policy (SDPF). - Quarterly public debt bulletin coverage broadened to include debt of SOEs, the social pension fund, and guaranteed debt from municipalities. - Box 2 summary points on SOEs: - From 2019 to 2023 government expenditures on SOEs (subsidies, transfers, debt servicing for on-lent loans, and capital injections) were notably high, exceeding half of health spending and over a third of education spending on average. - Capital injections rose from 0.4 percent of GDP in 2020 to 0.8 percent of GDP in 2023. - Government-guaranteed SOE debt reached 8.6 percent of GDP by 2023. - Policy recommendations include adopting updated SOE laws, establishing clear SOE ownership policy, operationalizing Parpública as a holding company with full transparency, improving SOE Manager data submission and performance targets, strengthening board selection and transparency, applying guaranteed fees, separating commercial and non-commercial activities, and ensuring regulatory neutrality. ### Evolution and composition of public debt (background) - Pre-pandemic growth and debt trends: - Between 2016 and 2019, growth averaged 5 percent per year. - Public debt decreased from its peak of 121 percent of GDP in 2015 to 115.7 percent in 2019. - COVID-19 impact: - Total public sector debt reached 157.5 percent of GDP at end-2021 (148 percent excluding SOE domestic guarantees). - Output contraction: 20.8 percent in 2020. - Public sector overall deficit in 2020: 9.3 percent of GDP. - Recovery and recent debt reductions: - GDP growth: 15.8 percent in 2022 and 5.5 percent in 2023. - Primary deficit contracted to 2 percent of GDP in 2022 from a 2021 primary deficit of 5.4 percent of GDP, implying a fiscal consolidation impulse of 3.4 percent of GDP in 2022. - In 2023, primary balance reached 2 percent of GDP (highest ever in the time series), driven by stronger tax revenues, one-off payment from the airport concession fee, and lower-than-expected execution of capital investments, delivering a fiscal consolidation impulse of 4 percent of GDP relative to 2022. - Debt to GDP ratio declined to 125 percent of GDP at end-2023 (116.4 percent of GDP excluding SOE domestic guarantees). - External public debt at end-2023: - Public external debt represented 80 percent of GDP. - External debt held by SOEs accounts for 0.7 percent of GDP. - International Monetary Fund, World Bank, and African Development Bank account for about 59.3 percent of external public debt. - Bilateral creditors account for about 18.3 percent of external public debt. - Average interest rate on external debt: about 1.07 percent. - Average maturity of external debt: about 15.2 years. - Commercial creditors hold 18.3 percent of external public debt; Caixa Geral de Depósitos (CGD) accounts for 82.8 percent of total commercial loans with average maturity of 10.4 years and average interest rate of 1.6 percent. - Domestic public debt at end-2023: - Domestic public debt: 44.8 percent of GDP at end-2023. - Central government domestic debt (excluding guarantees to SOE debt): 36.2 percent of GDP at end-2023. - Treasury bonds accounted for 96.4 percent of central government domestic debt. - Commercial banks hold 65.1 percent of domestic government securities; non-banks hold 34.9 percent (most with national social security fund). - Reliance on domestic debt has been largely steady around 30 percent of total public debt over the last decade. - Publicly guaranteed debt at end-2023: - Publicly guaranteed debt: 10.3 percent of GDP. - External debt guarantees: 0.7 percent of GDP. - State guarantees account for 7.4 percent of total debt. - Stock of uncalled domestically guaranteed debt to loss-making SOEs and municipalities: 8.2 percent of GDP at end-2023. - Underlying debt service of such guaranteed debt totaled 3.1 percent of GDP. - For 2023, largest recipients of guarantees included ASA, TACV, SDTIBM, ELECTRA. - Annual financing needs of TACV after nationalization in July 2021 estimated at 1 percent of GDP, financed through direct capitalization and central government guaranteed domestic loans. - Cost and structure of debt service: - Central government domestic debt service at end-2023: 4.9 percent of GDP. - Average maturity of central government domestic debt: around 6 years. - Average interest rate on central government domestic debt: about 3.5 percent. - Debt service on uncalled domestic guarantees to SOEs in 2023: 3.1 percent of GDP (non-cashflow payments if guarantees are not called). - Average maturity of guaranteed loans: around 3 years. - Average interest rate of guaranteed loans: 6.1 percent. - Ratio of public external debt service to exports: 10.8 percent in 2022 and 12.6 percent in 2023. - Ratio of public external debt service to revenue: 19.1 percent in 2022 and about 20.5 percent in 2023. - Projected average public external debt service to revenue over the medium term (2026-2031): about 14 percent. - Total public debt service including debt service of uncalled domestic guarantees to SOEs absorbed about 51 percent of revenue and grants of the central government in 2023 and is projected to reach 56 percent in 2029. - Historical private external debt: - Private external debt stock from IIP data about 14.7 percent of GDP at end-2023, down from 20.7 percent in 2020. ### Outlook and key macroeconomic assumptions - Macroeconomic assumptions broadly in line with the last DSA. - GDP growth assumptions: - Projected GDP growth: 6 percent in 2024. - Medium-term potential growth convergence: 4.8 percent. - Inflation expected to moderate in 2024 after normalization in 2023. - Risk factors: - Worsening in terms of trade is a source of risk due to pass-through from international oil and food prices. - Imports account for about 80 percent of consumption products, amplifying terms-of-trade risks. *Source: 1cpvea2025001-print-pdf - 1. The debt coverage in this DSA comprises debt owed by the central government and certain government guarantees (IMF staff and Cabo Verde authorities content as provided).* ### 14. Medium- and long-term growth will be supported by the implementation of ### 14. Medium- and long-term growth will be supported by the implementation of ### Structural reforms and development strategy - Authorities are implementing the five-year development strategy (Plano Estratégico para o Desenvolvimento Sustentável – PEDS II) building on the long-term development plan (Cabo Verde Ambition 2030). - Priority areas include: - completing SOE reforms, including through privatization, and improving the efficiency of public enterprises; - promoting economic diversification by leveraging the potential of the blue economy; - reducing the level of informality; - facilitating access to finance, particularly for small and medium-sized enterprises. - Implementation support: technical assistance and project financing from the World Bank and the ongoing ECF arrangement. ### Key macroeconomic assumptions and projections - Real GDP growth: - 2023: Real GDP expanded by 5.5 percent. - 2024: Growth is projected to reach 6 percent. - Long-term growth: gradually converge to long-term growth of 4.8 percent (supported by key structural reforms). - Historical trend reference: averaged at 5.4 percent in 1980-2019 or 5.1 percent when considering 1980-2023 (HP filter model). - Tourism services: - Continued growth assumed; linked to increase in hotel capacity, diversification of markets and steady FDI inflows. - Most common tourist origin countries: UK, Portugal, Germany, and Belgium. - Inflation: - 2023: Inflation narrowed to 1.3 percent and the GDP deflator to 3.8 percent (from 7.9 and 6.3 in 2022, respectively). - 2024 projection: inflation and the GDP deflator are projected to move to 2 percent and 2.1 percent, respectively. - RSF resources and climate-related financing: - RSF disbursements increase external financing by about CVE 1 billion in 2024 and CVE 2.1 billion in 2025. - From a balance of payments standpoint, RSF disbursements increase international reserves by CVE 0.7 billion in 2024 and CVE 2.5 billion in 2025. - From 2026 onwards, the funding substitution ends and net domestic issuance returns to its prior path. - NDC estimates investment needs (public and private) between now and 2030 at about 6.1 percent of GDP per year. - Public investment path is constrained to put public debt dynamics on a firm downward path and is below the NDC estimation. ### Public sector fiscal framework and measures - Fiscal stance: - Medium-term approach aims to gradually reduce the primary expenditures-to-GDP ratio while balancing climate priorities and essential reforms, with capital spending rising moderately. - Wage bill and goods/services spending will grow below inflation after the 2024 increase. - Fiscal balances: - Fiscal deficit improved from 4.3 percent of GDP in 2022 to 0.3 percent in 2023. - Set to stabilize at around 0.6 percent in the medium term. - Revenue measures and targets: - Recent measures: VAT invoicing, tobacco tax, and airport concessions. - Planned review of tax expenditures to yield up to 1 percent of GDP over 2025 and 2026. - SOE reforms: - Aim to reduce capitalization and on-lending from 2025 onwards, reducing net financing needs to 0.6 percent of GDP by 2027. ### External sector and reserves - Current account: - Baseline forecasts: deficit of 0.3 percent in 2024 and 2.2 percent in 2025. - Medium-term: current account deficit projected at 2.4 percent of GDP in 2026. - By 2028-2032, deficit projected to average around 3.9 percent of GDP. - Exports and imports: - Exports boosted by EU fish licenses approved in January. - Rising imports (especially capital goods) expected to widen the deficit later in the year. - International reserves: - Fell to €647 million in September 2024 due to increased bank holdings abroad but are expected to recover slightly by year-end, covering five months of imports. - Comparison to last DSA: current account set to deteriorate due to increased imports tied to RSF reforms and low-carbon technologies, while medium-term FDI is expected to rise. ### Financing strategy and assumptions (DSA) - Financing mix: prudent borrowing strategy emphasizing external financing on concessional terms, with domestic debt share remaining about 30 percent. - 2024 budget financing: domestic lending and 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$96 million, about 3.5 percent of GDP, expected in 2024. - Long-term concessionality: DSA premised on continued concessional external support in the short and medium term, with a 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 assumptions: - Bonds issuance with maturities of at least 4 years. - Average interest rate assumptions: 3 percent for T-bills, 4 percent for short-term bonds, and 5 percent for medium to longer-term bonds. - Risk: projections subject to risks from tightening monetary policy that could affect the entire yield curve. ### Indicators and projections for domestic public debt - Domestic debt-to-GDP ratio: decline from around 43.2 percent in 2024 to 24.7 percent by 2034. - At end-2034, domestic debt-to-GDP ratio, excluding the stock of uncalled guarantees to SOEs, projected to be close to peers at around 19 percent of GDP. - Domestic debt service to revenues (including grants): - Peaks in 2029 at around 43 percent. - Declines to 36.8 percent in 2034. - Net domestic debt issuance: - Sharp increase in 2020 due to pandemic financing needs. - Issuance ratios move towards zero in 2023-2026 and turn slightly negative from 2026 onward as concessional external debt becomes main source of financing. - Borrowing composition: - 98 percent of new domestic debt issuance expected to be medium to long-term (MLT). - Low average real interest rate for MLT issuance: 1.4 percent. - 6-year average maturity for MLT issuance. - Short-term debt accounts for 2 percent with a negative real interest rate of -0.1 percent. - Market depth: domestic market has sufficient depth, supported by banking sector liquidity and INPS's pension fund capacity, to absorb potential guarantee calls. ### Realism assessments and drivers of projections - Fiscal adjustment realism: - Primary balance adjustment path of about 1 percent of GDP over 2024–26 is roughly in the middle of the historical distribution of adjustment for LICs. - Authorities have identified measures estimated to increase revenue collections by close to 1 percent of GDP (tourist tax increase, 5 percent duty on previously exempted imports, electronic tax invoicing). - Drivers of debt dynamics: - Interest rates expected to contribute positively to PPG external debt accumulation, but less so than historically. - Current account developments and FDI flows projected to exert larger downward pressure on debt accumulation than historical experience, justified by continued tourism growth and remittances. - For total public debt, projected contribution of real GDP growth to debt reduction is higher compared to the historical five-year change. - Continued fiscal efforts and SOE restructuring expected to improve the primary deficit contribution to debt accumulation. - Consistency between fiscal adjustment and growth: - Projected growth for 2024 and 2025 consistent with lower-end multiplier-based projections due to large import content of investment and consumption. - Realism of adjustment predicated on authorities’ commitment to fiscal consolidation and SOE restructuring, underpinned by steady increase in economic activity following return to pre-pandemic growth levels and structural reforms under PEDS II. - Public investment and growth: - Public investment contribution to real GDP growth remains marginal, reflecting low multiplier due to substantial import content of capital spending. - Public investment expected to average about 4.5 percent of GDP in the medium term, in line with the last DSA. ### Country classification and debt-carrying capacity - Debt-carrying capacity assessed as “strong” (as in June 2022 DSA for second review of the PCI). - Composite indicator (CI) score: - CI score for Cabo Verde stands at 3.26 (based on October 2024 WEO vintage and 2023 CPIA), slightly above last DSA and threshold of 3.05 for “strong” rating. - CI score contributions: CPIA (46 percent), international reserves (32 percent), world growth (12 percent), remittances (6 percent), and country real growth rate (4 percent). ### Debt sustainability analysis (DSA) outcomes and stress tests - External public debt (PPG external debt): - Under baseline: PV of PPG external debt-to-GDP ratio remains below its threshold throughout projection period; risk of external debt assessed as moderate. - Under stress tests: PV of PPG external debt-to-GDP ratio breaches its threshold under several stress tests. - Under the currency depreciation shock, PV of PPG external debt-to-GDP rises to about 71 percent in 2025 before gradually decreasing to the threshold of 50 percent of GDP up to 2030. - PV of PPG external debt-to-exports and debt service to export ratio exceed thresholds from 2025–33 under the export stress test. - Vulnerability: projections appear vulnerable to export shocks due to high concentration in tourism. - Total public debt: - PV of total public debt-to-GDP ratio exceeds the 70 percent benchmark through 2030 under the baseline scenario, giving rise to a mechanical high-risk signal. - Prescribed benchmark breached under each of the six standardized bound tests, tailored combined contingent liability test, and natural disaster shock. - Growth shock is the most severe, with the threshold breached throughout the projection period. - Debt outlook particularly vulnerable to export and climate disaster shocks. - Standardized climate disaster shock assumption: increase of public debt of 10 percent of GDP at the second year of the forecast horizon. - Overall risk rating: - Public debt is sustainable but remains at high risk of debt distress. - Present value of public debt to GDP remains above its threshold under the baseline scenario through 2030. - Debt service projected to average about 50 percent of revenues over the next five years. - Stress tests indicate greatest vulnerability to a growth shock; public debt would remain above threshold for a prolonged period under such shocks. - Mitigating factors: support from Portugal through an agreement to swap debt service payments on some debt to Portugal. ### Main vulnerabilities and risks - Key risks: - Natural disasters and climate change events with direct impact on tourism and economic activity. - Exposure to export shocks given high concentration in tourism. - Increased imports tied to RSF reforms and low-carbon technologies that may deteriorate the current account. - Tightening of monetary policy that could raise domestic interest rates and affect the yield curve. - Balance sheet and market considerations: - Additional debt service from uncalled domestic guarantees to SOEs does not impact central government cash flows. - Domestic market depth supported by banking sector liquidity and INPS's pension fund capacity to absorb potential guarantee calls. *Source: IMF country DSA chapter content provided in the supplied PDF excerpt.* ### 6.6 million Euro per year) up until 2025 for climate- related investments that was agreed ### CABO VERDE ### Economic outlook and risks - Economic activity grew 9.4 percent in the first semester of 2024. - Staff projects 6 percent GDP growth in 2024. - Inflation: 1.7 percent year-over-year (2024). - Current account: 1.2 percent of GDP surplus in the first three quarters of 2024. - Medium-term current account is expected to converge towards a deficit of about 2.5 percent. - Key downside risks: - Dependence on a broadly stable global environment supporting tourism. - Higher fuel and commodity prices or weaker-than-expected outlooks in key markets could reduce growth. - Long-term climate change risks (droughts, sea level rise, increased frequency and severity of extreme weather events) affecting tourism and coastal regions. ### Fiscal policy, revenues, and debt outlook - Authorities’ fiscal objective: sustained consolidation to reduce debt, improve fiscal health, and lower debt distress risks. - Primary fiscal balance projection: surplus of 1.4 percent by 2026. - Overall deficit projection: shrink from 2.4 in 2024 to 0.2 percent by 2028. - Revenue measures: higher taxes on tobacco, alcohol, tourism, and imports; introduction of a tourism tax. - 2024 fiscal outcomes: - Tax revenues increased 13 percent year-over-year. - Primary deficit in 2024: 0.1 percent of GDP (indicated for the year). - Fiscal primary balance outperformed projections in first three quarters of 2024. - Public debt dynamics: - Public debt-to-GDP ratio expected to continue to decline through 2025 even with higher public investment. - Medium to long-term debt sustainability supported by growth-enhancing structural reforms, reducing fiscal risk from SOEs, addressing critical infrastructure gaps, developing government securities market, and lowering domestic borrowing costs. - Fiscal governance and SOEs: - New SOE law enacted; efforts to restructure or divest some public enterprises. - With World Bank and development partner support, authorities are studying options to increase efficiency and mitigate risks in transport, energy and water sectors. - Specific climate-related commitment noted: "6.6 million Euro per year) up until 2025 for climate-related investments that was agreed before the RSF negotiations." (text preserved exactly as provided) ### Debt sustainability and stress-test findings - Debt sustainability analysis covers 2024–34 and 2023–44 horizons (figures and tables referenced). - Stress test assumptions: - All additional financing needs from stress tests are assumed covered by PPG external MLT debt. - Default terms of marginal debt based on baseline 10-year projections. - Indicators presented include: - Debt Service-to-Revenue Ratio (2024–34 series shown). - PV of Debt-to-Exports Ratio (2024–34 series shown). - PV of Debt-to-GDP Ratio (2024–34 series shown). - Debt Service-to-Exports Ratio (2024–34 series shown). - Qualification of moderate category (2024–34) uses thresholds where: - For PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. - For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent. - Drivers of debt dynamics (baseline scenario) include contributions from: - Real GDP growth, nominal interest rate, price and exchange rate, current account + FDI, primary deficit, and other debt-creating flows. - Realism tools and fiscal adjustment metrics: - Projected 3-year adjustment distribution and possible growth paths under fiscal multipliers (multipliers shown: 0.2, 0.4, 0.6, 0.8). - Historical and projected investment rates (public and private) compared across DSA vintages. ### Monetary and financial sector policies - Monetary policy: being tightened to protect fixed peg exchange rate regime; BCV has gradually raised rates to close the interest rate differential with the ECB. - International reserves: - BCV target range: 5 to 5.5 months of prospective imports. - Reserves fell between June and August 2024, then resumed increasing since September 2024. - The authorities requested a waiver for the unmet QPC for gross international reserves (GIR) and a modification of the end-December QPC to reflect a lower base. - Banking sector soundness: - Regulatory capital: 22.5 percent of risk-weighted assets (regulatory minimum is 12 percent). - Banks described as well-capitalized, profitable, and liquid. - Authorities monitoring increase in NPLs and prepared to use supervisory and macroprudential tools. - Institutional reforms: - Amendments to the Organic Law of the BCV submitted to parliament in September (year implied by context). - Initiatives launched to strengthen the AML/CFT framework. ### Growth strategy, social inclusion, and climate resilience reforms - Five-year development strategy priorities: - Improve access to finance and the business environment to increase potential growth and resilience. - Continue reducing youth unemployment and poverty. - Streamline legal procedures for businesses; focus on SMEs. - Encourage diversification: digital economy, connectivity, and the blue economy. - Support vulnerable households through targeted cash transfers. - Social registry: - Coverage expanded to 100 percent of poor and vulnerable households (part of RM 7). - RSF-supported climate agenda: - Focus areas: strengthening climate governance, improving resilience, enhancing energy efficiency, promoting water sustainability, building financial sector resilience to climate change. - Ministry of Finance included a quantitative analysis of fiscal risks due to climate change in its annual Fiscal Risk Statement as part of the 2025 Budget. - Progress and delays: - Substantial progress on expansion of social registry and development of natural disaster risk and vulnerability maps. - BCV’s development of a climate information architecture for banks will be delayed to the next review due to complexity and need for capacity development. - Other RMs under the RSF have been delayed, but critical reforms related to energy and water tariffs are advancing. ### Program performance and authorities’ views - Program performance (review period highlights): - All quantitative performance criteria (QPC) for the review were met except the floor for gross international reserves (GIR). - Continuous PCs met except GIR. - Structural benchmarks for fiscal and SOE reforms were met; the SB related to the organic BCV law was completed with a slight delay. - Indicative targets met except the one relative to GIR. - Authorities report corrective actions taken to address reserves shortfall. - Authorities’ statement (key excerpts and claims): - "Cabo Verde’s macroeconomy continued its strong performance in 2024." - Program ownership and commitment emphasized; authorities "remain determined to push forward the critical climate agenda and achieve program goals." - Concluding emphasis: continued engagement with the Fund and reliance on Fund support to ensure long-term macroeconomic stability, boost potential growth, improve social welfare, and increase resilience to climate change. *Source: Excerpted content from the Cabo Verde IMF staff report chapter (PDF) provided.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1cpvea2025001-print-pdf.pdf_