## Cabo Verde: IMF Staff Report Excerpt (1cpvea2025002-source-pdf) ## Source details **Canonical URL:** [Cabo Verde: IMF Staff Report Excerpt (1cpvea2025002-source-pdf)](https://www.imf.org/-/media/files/publications/cr/2025/english/1cpvea2025002-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1cpvea2025002-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1cpvea2025002-source-pdf.pdf.json) --- ### Executive summary and program requests - Program frameworks: - 36-month ECF arrangement approved June 15, 2022: SDR 45.03 million (190 percent of quota). - 18-month RSF arrangement approved December 11, 2023: SDR 23.7 million (100 percent of quota). - Authorities request: - A 15-month extension of the ECF arrangement (extension until December 21, 2026). - An augmentation of the ECF equal to 30 percent of quota (SDR 7.11 million), total ECF SDR 52.14 million. - A 15-month extension of the RSF arrangement. - Interim action: technical 3-month extension through September 21, 2025, approved by the Board to allow time for preparing the sixth ECF review. ### Recent developments and key macroeconomic outcomes (2024–early 2025) - Growth and inflation: - Real GDP growth in 2024: 7.3 percent. - Inflation in 2024: 1.0 percent on average; 1.4 percent y-o-y in December 2024. - Core inflation at end-2024: 1.6 percent (y-o-y). - Inflation in the first four months of 2025 rose above 2 percent y-o-y for the first time since October 2023. - External sector: - Current account balance 2024: surplus of 3.7 percent of GDP. - Financial account 2024: deficit of 3.8 percent of GDP (versus a surplus of 3.9 percent of GDP in 2023). - Gross international reserves (GIR) at end-December 2024: €736 million (target €643 million), covering 5.9 months of prospective imports. - Fish exports account for about 80 percent (summary) / 79 percent (detailed table) of total goods exports in 2024. - Fiscal sector: - Tax-to-GDP ratio 2024: 20.1 percent (increase of 0.9 percentage point over 2023). - Tax collection growth: 14 percent y-o-y. - Overall revenue growth: 7 percent. - Primary expenditure: 23.4 percent of GDP. - 2024 primary balance: surplus of 1.3 percent of GDP (versus projected deficit of 0.1 percent at the fifth review). - Monetary and financial sector: - BCV policy changes: deposit rate increased by 30 bps in May 2025 to 2.25 per cent; policy rate stood at 2.5 percent with a positive differential of 35 bps relative to the ECB policy rate in one summary and 10 bps in another table—both figures appear in the source. - Banks’ external assets: €84 million at end-2023; €222 million at end-December 2024; €261 million in 2025Q1. - As of March 2025: M2 grew by 8.2 percent y-o-y; total deposits grew by 7.6 percent; credit to the private sector grew by 5.0 percent. - Banking soundness (end-December 2024): CAR 23.9 percent; ROE 18.3 percent; ROA 1.9 percent; NPLs 7.9 percent of total loans. ### Outlook and risks - Growth and inflation projections: - Growth expected in 2025: 5.2 percent. - Growth converging to 4.8 percent by 2028 (potential growth around 4.8 percent). - Inflation projected to stay near 2 percent, aligned with euro area trends. - External sector projections: - Current account: 2025 projected deficit -1.3 percent of GDP; 2026 projected deficit -2.4 percent of GDP. - Financial account: 2025 projected recovery to 0.1 percent of GDP; 2026 projected surplus of 1.9 percent of GDP. - Reserve coverage ratio projected to reach 5.3 over the medium term; reserves remain within BCV target levels. - Main risks (selected): - Global uncertainty, trade tensions, external financing challenges (including uncertainty around MCC third compact). - Rising spending needs for climate and infrastructure. - Slower tourism growth and delays in SOE reforms. - Vulnerability of foreign reserves to external shocks. - Contingency measures for severe downside: - Expand social protection. - Adjust fiscal expenditures while safeguarding capital spending. - Advance structural reforms to improve competitiveness and productivity. ### Program performance and reform implementation - QPCs and SBs: - All quantitative performance criteria for end-December 2024 and all continuous PCs under this review were met. - All structural benchmarks under this review were met. - Indicative Target on social spending at end-December 2024 was not met (by a small margin). - RSF reform measures (RMs): - Implementation relatively weak and slower than expected. - None of the six RMs due under this review completed; no RSF disbursement to date under the RSF arrangement. - Rephasing of RM4, RM5, RM6, RM7, RM8 and RM9 proposed; new target dates span October 2025–April 2026 in the source. ### Policy priorities and recommended measures - Fiscal consolidation and public financial management: - Preserve debt sustainability through fiscal consolidation and strengthened PFM. - Creation of a new tax authority in 2025 with human and IT resources; VAT reform law to be submitted to parliament by end-June 2025. - Reduce VAT, PIT, and customs tariff exemptions; tackle international tax avoidance. - Procurement efficiencies and public investment management improvements. - SOE governance and fiscal risk reduction: - Enforce timely publication of audited financial statements for SOEs (SB7 end-December 2025; SB8 end-June 2026). - Pursue broader SOE restructuring/divestment strategy (airports, pharmaceuticals, ports) and address loss-making TACV airline. - Monetary policy and financial resilience: - Modernize monetary policy framework; maintain peg; scope for further tightening given net foreign asset accumulation and rising inflation. - Recommend restoring reserve requirements gradually; strengthen BCV open market operations and sterilization; include forward guidance in BCV communications. - Enhance macroprudential framework: adopt key Basel III elements, introduce CCB and CCyB, LTV limits for mortgages, implement LCR framework. - Structural reforms and climate resilience: - Advance investments in renewable energy, digitalization, and the blue economy. - RSF reforms to mobilize private climate finance and increase resilience (energy and water sector reforms, climate finance strategy, natural disaster risk mapping). ### Financial sector structure, vulnerabilities, and macroprudential recommendations - Banking system concentration and size: - Banking system assets: 126.4 percent of GDP in September 2024. - Two banks of high systemic importance hold around 55 percent of total assets and 62.1 percent of total credit. - Heavy reliance on INPS deposits is a material liquidity concern. - NPLs and provisioning: - NPLs rose to 11 percent in 2024Q3 (largely due to airline SOE) and declined to 7.9 percent in 2024Q4. - Provisions to NPLs: examples include 86.4 (2020Q4) and 63.8 (2024Q4) in the source series. - Macroprudential TA recommendations (March 2025): - Finalize legal framework for BCV as macroprudential authority; set Financial Stability Committee mandate. - Make systemic risk assessment forward-looking; accelerate adoption of Basel III elements; introduce CCB and CCyB; implement LTV limits; implement LCR with differentiated runoff rates. - Update prudential provisioning guidelines in line with IMF recommendations. - Liquidity drivers and policy recommendations: - Excess liquidity driven by lower reserve requirements, COVID-19 injections, higher foreign interest rates, and limited lending. - Policy steps: restore reserve requirements, gradually shift INPS assets abroad in coordination with BCV, enhance sterilization and open market operations. ### RSF reform measures, sequencing, and expected impacts (selected RMs) - RM1: Climate governance council — Status: Completed (End-April 2024). - RM2: Fiscal risk analysis for climate — Status: Completed (End-Sept. 2024). - RM3: Amend PPP framework to include climate requirements — Status: Completed (End-April 2024). - RM4: National climate finance mobilization strategy and pipeline of appraised public capital projects — Status: On track; timing End-October 2025 (7th ECF Review). - RM5: Electricity cost-recovery tariff methodology and regulations — Status: On track; timing End-December 2025 (8th ECF Review). - RM6: Water cost-recovery tariff and reforms (scope narrowed to Santiago Island) — Status: On track; timing End-December 2025 (8th ECF Review). - RM7: Expand Unique Social Registry (USR) to full coverage — Status: Near completion; timing End-October 2025. - RM8: Natural disaster risk and vulnerability maps; land use and construction code amendments — Status: Near completion; timing End-October 2025. - RM9: BCV climate information architecture for banks (taxonomy, disclosure guidelines) — Status: In progress; timing TBC End-April 2026 (9th ECF Review). ### External financing, balance-sheet aggregates, and financing gap (selected figures from Text Table) - Current account balance (Millions of Euros): 2020 -246; 2021 -210; 2022 -76; 2023 -599; 2024 4; 2025 -35; 2026 -70. - Exports of goods (Millions of Euros): 2024 303; 2025 308; 2026 323. - Imports of goods (Millions of Euros): 2024 1,085; 2025 1,200; 2026 1,308. - Exports of services (Millions of Euros): 2024 768; 2025 791; 2026 823. - Imports of services (Millions of Euros): 2024 277; 2025 303; 2026 332. - Financial account, net (Millions of Euros): 2024 -97; 2025 35; 2026 7. - Overall balance (Millions of Euros): 2024 5. - Financing gap (Millions of Euros): 2022 -14; 2023 -19; 2024 -11; 2025 -14; 2026 -6. - Targeted reserves path (months of prospective imports): 2024 5.9; 2025 5.6; 2026 5.4. ### Debt outlook, capacity to repay, and Fund exposure - Public debt and projections: - Debt-to-GDP: 2023 116.6 percent; end-2024 109.9 percent; expected end-2025 104.9 percent. - Program aim: debt below 70 percent of GDP by 2034. - Fund credit and repayment metrics: - Fund credit outstanding peaks in 2026 at 390 percent of quota (per source) and around 3.9 percent of GDP in 2026 (peak Fund credit share). - Annual repayments to the Fund peak in 2029 at 1.2 percent of exports, 1.8 percent of reserves, and 9.5 percent of PPG external debt service (as shown in source tables). - Assessment: - February 2025 joint Bank/Fund DSA assessed Cabo Verde at high risk of overall debt distress and moderate risk of external debt distress; updated analysis indicates no significant changes. - Debt largely on concessional terms with low average interest rate around 1 percent and favorable maturity profile. ### Quantitative targets, reporting, and program conditionality (selected) - Exchange rate: program exchange rate CVE 98.8 per USD. - Key quantitative/continuous targets and definitions include: - Floor on central government primary balance (cumulative, cash basis; adjustments for grants). - Cumulative floor on central government tax revenue (cumulative flow). - Floor on Net Other Liabilities (loans to SOEs and municipalities and capitalization). - Ceiling on Net Domestic Financing (NDF) of the central government (definitions and adjustors specified). - Non-accumulation of domestic payments arrears (definitions and reporting timelines). - Ceiling on PV of new external concessional debt (concessionality defined as grant element ≥ 35 percent; unified discount rate 5 percent). - Zero ceiling on non-concessional external debt (continuous). - Floor on Gross International Reserves (GIR) of BCV (monthly reporting with maximum delay four weeks). - Memorandum item: Floor on central government social spending (indicative; cumulative measurement). - Data and reporting timelines: monthly, quarterly, and annual transmissions specified with lags no greater than six weeks (quarterly) or four weeks (GIR), and annual transmissions within three months after the year-end for some items. ### Risk Assessment Matrix — selected risks and policy responses - Conjunctural risks: - Regional conflicts — Likelihood: Medium; Impact: High. Policy response: slow unwinding of support, create fiscal space, contingency planning. - Sovereign debt distress — Likelihood: High; Impact: High. Policy response: maintain reserves, fiscal consolidation, rely on concessional financing, tighten monetary policy if needed. - Commodity price volatility — Likelihood: Medium; Impact: High. Policy response: build buffers, diversify energy usage, targeted supports. - Structural risks: - Deepening geoeconomic fragmentation — Likelihood: High; Impact: High. Policy response: prioritize diversification, contingency planning, accelerate structural reforms. - Climate change — Likelihood: Medium; Impact: Medium/High. Policy response: prioritize climate-resilient investments, improve risk management and building codes. - Domestic risks: - Faltering fiscal consolidation — Likelihood: Medium/High; Impact: High. Policy response: unwind temporary measures, revenue reforms, improve capital expenditure management, contain non-priority spending. - Delays in SOE reforms — Likelihood: Medium; Impact: Medium. Policy response: follow through with SOE reform plans and improve stakeholder communication. ### Program decisions and staff support - Staff supports: - Completion of the sixth review under the ECF arrangement. - The requested extension and augmentation of the ECF arrangement. - The extension of the RSF arrangement and rephasing of delayed RM availability dates. - Financing stance: - Program described as fully financed with firm commitments for the 12 months following the review; good prospects for adequate financing for remainder of extended program. - Notable operation: Portugal increased its debt-for-climate swap with Cabo Verde from US$13 million to US$45 million (January 2025 announcement; operational rules pending). *Source: EXECUTIVE SUMMARY and selected excerpts, 1cpvea2025002-source-pdf (INTERNATIONAL MONETARY FUND).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Cabo Verde’s economy continued to perform well in 2024 with maintained macroeconomic and financial stability and authorities committed to program objectives. - A 36-month ECF arrangement (approved June 15, 2022, SDR 45.03 million, 190 percent of quota) and an 18-month RSF arrangement (approved December 11, 2023, SDR 23.7 million, 100 percent of quota) underpin the policy agenda. - Authorities request: - A 15-month extension of the ECF arrangement (extension until December 21, 2026). - An augmentation of the ECF equal to 30 percent of quota (SDR 7.11 million), bringing the total ECF to SDR 52.14 million. - A 15-month extension of the RSF arrangement. - A technical 3-month extension through September 21, 2025, was approved by the Board to provide more time for preparing the sixth ECF review. ### Recent Developments and Key Macroeconomic Outcomes (2024–early 2025) - Growth and inflation: - Real GDP growth in 2024: 7.3 percent. - Inflation in 2024: 1.0 percent on average; 1.4 percent y-o-y in December 2024. - Core inflation at end-2024: 1.6 percent (y-o-y). - Inflation in the first four months of 2025 rose above 2 percent y-o-y for the first time since October 2023. - External sector: - Current account balance 2024: surplus of 3.7 percent of GDP (first surplus since the pandemic). - Financial account 2024: deficit of 3.8 percent of GDP (relative to a surplus of 3.9 percent of GDP in 2023). - Gross international reserves (GIR) at end-December 2024: €736 million (target €643 million), covering 5.9 months of prospective imports. - Fish exports account for about 80 percent of Cabo Verde’s total goods exports. - Fiscal sector: - Tax-to-GDP ratio 2024: 20.1 percent (increase of 0.9 percentage point over 2023). - Tax collection growth: 14 percent y-o-y. - Overall revenue growth: 7 percent (reflecting mild nominal contraction in grants and under-execution of capital spending). - Primary expenditure: 23.4 percent of GDP. - 2024 primary balance: surplus of 1.3 percent of GDP (versus a projected deficit of 0.1 percent at the fifth review). - Monetary and financial sector: - BCV policy changes: deposit rate increased by 30 bps in May 2025 to 2.25 per cent; policy rate stood at 2.5 percent with a positive differential of 35 bps relative to the ECB policy rate (adjustment from a negative 215 bps in September 2024). - Banks’ external assets: €222 million at end-December 2024; increased to €261 million in 2025Q1; end-2023: €84 million. - As of March 2025: M2 grew by 8.2 percent y-o-y; total deposits grew by 7.6 percent; credit to the private sector grew by 5.0 percent. - Banking sector soundness at end-December 2024: - Regulatory capital to risk-weighted assets (CAR): 23.9 percent. - Returns on equity and assets: 18.3 and 1.9 percent, respectively. - Non-performing loans (NPLs): 7.9 percent of total loans. ### Outlook and Risks - Growth and external projections: - Growth expected in 2025: 5.2 percent. - Growth converging to 4.8 percent by 2028. - Inflation projected to stay near 2 percent. - Current account projected to return to deficit at -1.3 percent of GDP in 2025 and widen to -2.4 percent in 2026. - Main risks: - Global uncertainty, trade tensions, and external financing challenges. - Rising spending needs for climate and infrastructure. - Slower tourism growth could contribute to imbalances. - Delays in SOE reforms and rising debt may impact fiscal stability. - Foreign reserves are adequate but vulnerable to external shocks. ### Program Performance and Reform Implementation - Performance through end-December 2024: - All quantitative performance criteria (PCs) for end-December 2024 and all continuous PCs under this review were met. - All structural benchmarks (SB) under this review were met. - The indicative target (IT) on social spending at end-December 2024 was not met, albeit by a small margin. - RSF reform measures: - Implementation of reform measures (RMs) under the RSF has been relatively weak and progressed more slowly than expected. - None of the six RMs have been completed under this review; no disbursement under the RSF arrangement to date. - Rationale for ECF augmentation and RSF extension: - Augmentation justified by increased prospective balance of payments needs stemming from global uncertainty, rising investment-related imports, and elevated external financing risks (including uncertainty around the Millenium Challenge Corporation (MCC) third compact). - Additional conditionality proposed to support authorities in addressing BoP needs and program objectives. - RSF extension would provide additional time to complete climate-related reforms given slower-than-expected RM implementation. ### Policy Priorities Highlighted - Preserve debt sustainability through fiscal consolidation and strengthened public financial management. - Address fiscal risks from state-owned enterprises (SOEs) and improve SOE financial management. - Modernize the monetary policy framework and enhance resilience of the financial system. - Advance strategic investments in renewable energy, digitalization, and the blue economy. - Continue capacity development support and targeted reforms to catalyze private finance for climate adaptation and transition. *Source: EXECUTIVE SUMMARY, 1cpvea2025002-source-pdf (IMF, June 25, 2025).* ### 7.3 percent), but substantially down from about 11 percent in 2024Q3. The improvement in the ### Cabo Verde: IMF Staff Report Excerpt ### Outlook and Risks - GDP growth in 2025 is projected at 5.2 percent with underlying potential growth around 4.8 percent. - Inflation is expected to remain aligned with euro area trends at around 2 percent. - Current account projections: - 2025: deficit of 1.3 percent of GDP. - 2026: deficit of 2.4 percent of GDP. - Medium-term current account projections downgraded relative to the 5th ECF review due to: - Intensification of global trade tensions. - Increased uncertainty regarding external financing (e.g., MCC’s third compact). - Financial account projections: - 2025: recovery to 0.1 percent of GDP. - 2026: surplus of 1.9 percent of GDP. - Projections for 2025 revised downward relative to the 5th ECF review reflecting persistence in banking sector outflows. - Reserve coverage ratio projected to reach 5.3 over the medium term, with reserves remaining within BCV target levels. - Downside risks highlighted: - Vulnerability to external shocks: energy, food prices, tourism. - Uncertainties related to global trade frameworks. - Climate-related risks: rising sea levels and extreme weather events. - Delays in SOE reforms and increasing public debt. - New US tariffs: direct impact likely small given the US accounted for 3.7 percent of goods exports in 2024 and proposed tariff at the low end (10 percent); indirect impacts could be larger through global slowdown and external financing risks. - ODA cuts: limited fiscal impact on the primary balance due to grants being typically earmarked. - Upcoming elections may create additional fiscal risks. - Upside scenario: continued strength in tourist arrivals could lift growth. - Contingency planning measures for a severe downside scenario include: - Expanding social protection to shield the most vulnerable. - Adjusting fiscal expenditures while safeguarding capital spending. - Advancing structural reforms to enhance international competitiveness and productivity. - Ongoing ECF and RSF policy efforts to diversify the economy, strengthen fiscal buffers, and increase climate resilience. - Export concentration and exposure: - Fish products: 79 percent of total exports in 2024. - Clothing and apparel: 10.5 percent of total exports in 2024. - Majority markets: 94.7 percent of exports destined for European markets, particularly Spain and Portugal. - Limited direct exposure to higher U.S. tariffs given export structure. ### Program Performance - Overall performance under the ECF has been strong; RSF reform measures have been implemented more slowly than expected. - Performance specifics: - All QPCs for end-December 2024 were met, as well as all continuous PCs. - Indicative Target (IT) for social spending at end-December 2024 was not met due to slower-than-projected spending increases in health and education programs. - Structural Benchmarks (SBs) related to tax expenditures and the adoption of the 2025 budget consistent with program parameters, both end-December 2024, were met. - RSF reform measures (RMs) status: - RM4 scheduled for this review will be delayed; FAD to provide additional TA to support RM4 by helping develop a pipeline of green and resilient capital projects. - RM5 and RM6 (cost-recovery tariffs for electricity and water) were scheduled for this review but are now expected to be implemented by end-2025; past FAD TA helped estimate these tariffs. - RM7 and RM8 are advanced but need additional work and are expected to be completed by October 2025. - RM9: authorities received training from MCM in September 2024, hired a consultant to provide capacity to BCV on banks’ climate information architecture; MCM will continue to provide TA. RM9 has been delayed since the 2nd RSF review; new implementation date is April 2026. - In summary, RM4, RM5, RM6, RM7, RM8 and RM9 will be delayed and rephased for future reviews. ### Policy Discussions #### A. Strengthen Public Finances to Preserve Debt Sustainability - Fiscal anchor and projections: - 2025 budget aligned with the program (SB, December 2024). - Primary balance projected at 0.5 percent of GDP in 2025 (below the 2024 outturn but exceeding previous projections of 0.4 percent of GDP at the fifth review). - Tax revenue developments: - 2024: tax revenue higher than expected at the fifth review due to stronger tax arrears collection, tax compliance measures, and higher tobacco and alcohol taxes. - 2025: tax collection expected to benefit from reduced tax expenditures (SBs, September and December 2024), cutting customs exemptions and other preferential tax treatment related to ECOWAS implementation (WTO-compliant), and harmonization of tobacco, alcohol, and fuel taxes. - Legislated tax on arrivals expected to be implemented in July 2025 following coordination delays with ICAO and the domestic civil aviation regulator. - Reduced CIT exemption on large investment-related imports passed into law in 2024. - VAT reform law to be submitted to parliament up to end-June 2025; expected to expand tax base in 2026. - Non-tax revenue: - Stronger-than-expected collection of services fees contributed to higher 2024 outturn. - Staff’s 2025 projections differ from the budget due to a 1.7 percent of GDP non-cash transfer from ASA, offset by equivalent airport infrastructure asset acquisition excluded from staff projections. - Other revenues were lower than budgeted due to a downward revision of recurrent collections compared to the fifth review by around 3 percent of GDP, partly reflecting lower property income linked to a reassessment of real estate asset values. - Grants: - Grants in 2024 were lower mostly due to under-execution of capital spending related to the non-operationalization of the third MCC compact. - Grants in 2025 are projected to increase by 0.3 percent of GDP. - Fifth review staff projections had included MCC compact grants assuming annual disbursements of 0.4 percent of GDP during 2024-2028; with the arrangement put on hold, grants projections are revised downward by the same amount, with a corresponding 0.4 percent of GDP reduction in current transfers in the BoP. - The freeze in MCC funding contributes to a weaker fiscal and external position, and hence larger BoP needs over the medium term. - Spending and financing: - Primary spending in 2025 projected to be 1.8 percent of GDP below the fifth review projections, reflecting higher nominal GDP growth and lower nominal expenditures. - Capital expenditures projected to rise in 2025; current expenditures increase reflecting legislated wage increase for public servants (following a five-year nominal freeze) and higher spending on goods and services tied to public investment feasibility studies. - For 2026, phasing out of the 2025 second tranche of the one-off airport concession fee will require structural expenditure consolidation. A new SB is proposed to ensure 2026 budget consistency with the program (SB, December 2025). - Financing needs projected to increase in 2025 with net external financing projected at 0.9 percent of GDP, exceeding 2024 mainly due to increased project and on-lending loans linked to higher capital expenditures. - The requested ECF augmentation of thirty percent of quota raises net external borrowing by 0.1 percent of GDP in 2025 and 0.2 percent in 2026. - Net domestic financing projected at 1.2 percent of GDP, slightly above 2024 (1.1 percent of GDP). - Public debt: - Public debt-to-GDP ratio continues to decline and is expected to reach 104.9 percent by end-2025, below pre-pandemic levels, notwithstanding increased capital and current expenditures. - February 2025 joint Bank/Fund Debt Sustainability Analysis (DSA) assessed Cabo Verde at high risk of overall debt distress, and at moderate risk of external debt distress; an updated analysis indicates no significant changes in that assessment. - DSA confirms (total) debt remains sustainable due to manageable debt service, supported by a favorable debt composition. - Authorities aim for a debt level below 70 percent of GDP by 2034 as a medium-term fiscal policy target beyond the ECF period. - Medium-term fiscal strategy: - Staff project a 2.1 percent of GDP decline in current primary expenditures in 2026, more than offsetting the phasing out of the 2025 airport concession fee. - Medium-term primary spending would stabilize at around 25 percent of GDP, with the wage bill at about 9 percent, consistent with SDS peers. - Medium-term structural primary balance projected to stabilize near 1.3 percent of GDP, broadly in line with the fifth review. - Additional measures recommended: tackle international tax avoidance, support green initiatives, reduce VAT, PIT, and customs tariff exemptions, form a new tax authority in 2025 with human and IT resources for digitalization, create a tax policy unit, and pursue procurement efficiencies to lower current primary spending. #### B. Reduce Fiscal Risks from SOEs and Improve Their Financial Management - SOEs are a key fiscal risk despite transparency improvements. - Energy sector reform: - World Bank-supported unbundling of Electra seen as positive and aligned with RSF objectives. - SOE performance concerns: - Ongoing losses at SOEs, especially in transportation, continue to strain fiscal accounts. - National airline defaults on government-guaranteed bank loans have increased NPLs and diverted resources from strengthening inter-island connectivity. - Enforcing timely publication of audited financial statements by all SOEs is critical (SB December 2025 and June 2026). - Restructuring/divestment strategy: - Authorities pursuing privatization initiatives in airport logistics and pharmaceuticals SOEs, and working on port concessions. - Need for a broader strategy, including improving inter-island air transport and a clear comprehensive plan for addressing the loss-making TACV airline that operates domestic and international routes. - Air transport developments: - Following withdrawal of the inter-island concessionaire, government established a new SOE airline to sustain domestic connectivity. - Domestic market has potential to break even given profitability of routes connecting Praia with Sal, Boavista, and Mindelo, possibly avoiding added fiscal strain. - New airline not operational; TACV has stepped in operating both domestic and external markets. - TACV’s international operations continue to incur losses, which may deepen with increasing competition from foreign low-cost carriers and should force authorities to rethink public financial support for international air connectivity. - Authorities cautious about becoming overly reliant on low-cost providers for international air travel. #### C. Modernize the Monetary Policy Framework and Improve Resilience of the Financial System - Monetary policy and peg: - Monetary policy remains focused on safeguarding the peg, backed by strong external buffers. - BCV has tightened policy and regularly shares data with staff on reserves and banks’ net FX positions. - Following policy actions by both BCV and ECB in May and June 2025, the interest rate gap with the euro area turned positive; banks’ (net) external assets continued to increase in 2025Q1. - In May 2025 communiqué, BCV raised the deposit rate and committed to a data-driven approach, closely monitoring reserves and commercial banks’ net foreign assets, but did not commit to further widening the positive policy rate differential. - Real policy rate at about 0.7 percent in April 2025 reached its highest level since late 2017 following continuous tightening over the past two years, but remains well below the historical pre-pandemic average of about 2¼ percent. - Given continued net foreign asset accumulation and rising inflation, scope exists for further tightening by BCV, especially as ECB normalization may be ending. - A substantial positive interest rate differential more consistent with pre-pandemic norms will be key to reversing banks’ financial outflows and protecting the peg; including forward guidance in BCV communications would be helpful. - Financial sector resilience: - Financial sector is stable but highly concentrated, with high NPLs requiring monitoring. - NPL trajectory: - NPLs increased from 7.3 percent in 2023Q4 to 11 percent in 2024Q3 largely due to the airline SOE. - NPLs declined to 7.9 percent in 2024Q4 due to improved economic activity and restructuring of a transport sector SOE NPL secured by a state guarantee. - NPL levels in Cabo Verde are in line with average levels among regional peers, including ECOWAS members. - The seven banks in the system held assets equivalent to (figure truncated in source). *Source: IMF staff report excerpt (Cabo Verde).* ### 126.4 percent of GDP in September 2024, dominated by two banks of high systemic importance ### 126.4 percent of GDP in September 2024, dominated by two banks of high systemic importance ### Banking system structure and key vulnerabilities - Banking system assets: 126.4 percent of GDP in September 2024. - Concentration: Two banks of high systemic importance hold around 55 percent of total assets of the banking system and 62.1 percent of total credit. - Heavy reliance on National Social Security Institute (INPS) deposits is identified as a material concern for liquidity and stability. ### Macroprudential findings and recommendations (from March 2025 TA mission) - Recommendations from the March 2025 macroprudential TA mission include: - Finalize the legal framework for the BCV as the macroprudential authority. - Set the mandate and operation of the BCV Financial Stability Committee to cover all micro and macro prudential matters. - Make the systemic risk assessment more forward-looking. - Accelerate adoption of some Basel III elements critical for macroprudential policy. - Introduce the Capital Conservation Buffer (CCB) and the Countercyclical Capital Buffer (CCyB) framework with a positive neutral CCyB level. - Introduce loan-to-value (LTV) limits for mortgages at a level that does not disrupt credit flows. - Implement a Liquidity Coverage Ratio (LCR) framework with highly differentiated runoff rates between sight and term deposits. ### Stress testing, provisioning, and supervision - Stress tests show resilience to simple shocks but highlight vulnerabilities from high portfolio concentration and sovereign debt exposure. - Rising credit-at-risk levels call for stronger supervision. - BCV advised to update prudential provisioning guidelines in line with IMF recommendations. ### Liquidity environment and monetary operations - Excess liquidity drivers: lower reserve requirements, COVID-19 liquidity injections, a higher interest rate abroad, and limited lending opportunities. - Consequence: banks have been encouraged to invest abroad. - Policy measures advised: - Gradually restore reserve requirements to levels closer to pre-pandemic norms to strengthen financial stability, boost international reserves, and improve monetary policy transmission. - Shift INPS assets abroad gradually and in coordination with the BCV to reduce excess liquidity while attaining a higher yield and reducing volatility via portfolio diversification. - Enhance BCV open market operations and sterilization efforts to manage excess liquidity effectively. ### BCV governance and safeguards - BCV is implementing the 2022 safeguards assessment recommendations. - Amendments to the BCV Organic Law, aligned with IMF recommendations to enhance decision-making, autonomy, and transparency, received general approval in May 2025 and are awaiting final parliamentary approval. - BCV supports amendments and plans to implement outstanding safeguards recommendations. - BCV established (April 2025) a dedicated unit to oversee AML/CFT/CPF supervision independently from prudential supervision. ### AML/CFT progress and remaining gaps - Since 2019 progress in technical compliance with the AML/CFT standard has been limited. - Advances since ENCAVE approval in 2023 include: - Approval in generality by the National Assembly (February 2025) of draft amendments to the AML law. - Preparation of a proposed legal framework on Ultimate Beneficial Ownership (UBO). - Establishment (April 2025) of a dedicated BCV unit for AML/CFT/CPF oversight. - Draft AML law amendments include obligations for regulatory and supervisory bodies to oversee Designated Non-Financial Businesses and Professions (DNFBPs). - With approval of the law, authorities must finalize implementing regulations and ensure effective oversight. - BCV needs to expand oversight of Virtual Asset Service Providers. ### Structural reforms for growth and climate resilience - Revenue-side: improve tax compliance and streamline tax exemptions and preferential treatments to broaden the tax base. - Spending-side: wage bill projected to grow less than nominal GDP; prioritize services and reduce direct procurement (SBs December 2025) to curb primary expenditure. - PEDS II priorities: access to finance, better business environment, SME-friendly reforms, private sector-led diversification, lower finance/electricity/water/transport costs, expand integrated tourist resort projects, develop blue and digital economies. - RSF reforms support private climate finance aligned with PEDS II goals. ### Social protection and climate-related measures - Cash transfers to the poorest increased, funded by the Social Protection Fund. - Ministry of Family and Social Inclusion expanded the Unique Social Registry (USR) to cover all poor and vulnerable households; inclusion of households in areas vulnerable to climate change is ongoing. - Staff to engage with authorities on achieving social spending targets. ### Results-based measures (RMs) progress and timelines - RM4: FAD support pending presentation of public capital projects pipeline; RM completion delayed to October 2025. - RM5: FAD CD (December) identified missing data for cost-recovery tariff calculation; RM completion delayed to December 2025. - RM6: FAD TA on water subsidy reform delivered in March; scope narrowed to Santiago Island; RM completion delayed to December 2025. - RM7: USR expanded to cover 100 percent of vulnerable households; inclusion of climate-vulnerable areas ongoing; RM expected completed by October 2025. - RM8: INGT completed natural disaster risk and vulnerability maps; land use and construction code amendments in process; RM expected completed by October 2025 (pending full documentation). - RM9: BCV hired consultant for climate taxonomy and disclosure guidelines; MCM to support review; RM completion delayed to April 2026. ### Program extension, augmentation, and objectives - Authorities request extension and augmentation of current ECF arrangement until December 21, 2026, to address BoP challenges, strengthen resilience, and mitigate fiscal and monetary vulnerabilities. - Extension rationale: continued concessional financing and policy guidance to maintain debt sustainability; enhance public financial management; facilitate investments in renewable energy, digital transformation, and blue economy; strengthen monetary policy framework. - An augmentation with three additional reviews and disbursements would meet projected BoP needs and support priority spending, particularly infrastructure and energy efficiency. ### Proposed conditionalities and structural benchmarks (2025–2026) - QPCs and Indicative Targets (ITs) expected to remain through September 2026. - New Structural Benchmarks focus on fiscal, monetary, and financial sector governance. - Fiscal SB highlights and deadlines: - Submission to Parliament of the 2026 national budget in full compliance with program parameters (SB1, end-December 2025). - Establish manual data exchange between DNRE and RNI for civil identification, real property ownership, vehicle registration (SB2, end-December 2025). - Initiate manual data exchange between DNRE and INPS to share taxpayer information (SB3, end-December 2025). - Transition to automated DNRE–INPS data exchange (SB6, end-September 2026). - Implement public procurement reforms (code and electronic public procurement) (SB4 and SB5, both end-December 2025). - Publish audited financial statements for SOEs to address fiscal transparency gaps (SB7, end-December 2025; SB8, end-June 2026). - Monetary and Financial Sector SBs: - Create integrated database system for BCV and Credit Registry Platform (CRC) to collect around 230 variables/indicators for macroprudential activities. - Strengthen macroprudential regulatory framework, including integration of systemic depositors into supervisory perimeter (SB9 end-December 2025; SB11 end-June 2026; SB12 end-September 2026; SB13 end-October 2026). - Enhance coverage and reliability of monetary statistics (SB10 end-March 2026; SB14 end-September 2026). ### Financing assurances, partners, and notable operations - Program financing: fully financed with firm commitments for the 12 months following the review; good prospects for adequate financing for remainder of extended program. - Financing sources: budget support from development partners and multilateral institutions, including the World Bank and African Development Bank. - Portugal announced in January 2025 an increase in its debt-for-climate swap with Cabo Verde from US$13 million to US$45 million, extending the arrangement through 2030; operational rules pending while debt service continues being paid directly to Portugal pending redirection to the Climate and Environmental Fund. ### Debt outlook, capacity to repay, and risks - Fund credit outstanding to Cabo Verde rises to the 75th percentile of past UCT arrangements for PRGT countries, with a peak in 2026 at around 3.9 percent of GDP. - Fund credit outstanding peaks in 2026 at 390 percent of quota, 15.5 percent of gross international reserves, and 10 percent of exports. - Annual repayments to the Fund peak in 2029 at 1.2 percent of exports, 1.8 percent of reserves, and 9.5 percent of PPG external debt service. - Assessment: Cabo Verde at high risk of overall debt distress but moderate risk of external debt distress per the February 2025 joint Bank/Fund DSA; updated analysis indicates no significant changes. - Debt composition: financed on concessional terms with a low average interest rate of around 1 percent and favorable maturity profile; de facto senior debt (IFIs, multilaterals, collateralized debt) major share of external debt. - Downside risks: high risk of overall debt distress, potential materialization of SOE risks reducing debt service capacity, spillovers from global shocks. - Mitigants: authorities’ strong track record of servicing Fund obligations, adequate reserve coverage, ongoing debt reduction under program. ### Program risks and monitoring - Program risks assessed as moderate. - Key external risks: global slowdown, intensification of conflicts, trade tensions, tighter financial conditions. - If risks materialize, authorities’ program track record and cooperation with IMF expected to support needed policy adjustments. ### Data, capacity development, and RSF resource use - Data provision: adequate for program monitoring. - CD strategy priorities: revenue mobilization, public finance, central banking, financial stability, macro statistics. - Use of RSF resources: - RSF disbursements would increase external financing by about CVE 1.5 billion in 2025 (0.5 percent of GDP). - RSF support substitutes for more expensive domestic financing with cumulative estimated savings in debt service equivalent to 0.4 percent of GDP until [text truncated in source]. *Source: INTERNATIONAL MONETARY FUND* ### 2029. These savings will help build buffers and make Cabo Verde more resilient to climate-related ### 2029. These savings will help build buffers and make Cabo Verde more resilient to climate-related shocks. ### External financing and balance-sheet aggregates (Text Table 7: Cabo Verde: External Financing Gap 2020-26) - Current account balance (Millions of Euros): 2020 -246; 2021 -210; 2022 -76; 2023 -599; 2024 4; 2025 -35; 2026 -70. - Balance of goods and services (Millions of Euros): 2020 -579; 2021 -602; 2022 -744; 2023 -824; 2024 -782; 2025 -892; 2026 -985. - Exports of goods (Millions of Euros): 2020 113; 2021 151; 2022 269; 2023 238; 2024 303; 2025 308; 2026 323. - Imports of goods (Millions of Euros): 2020 692; 2021 753; 2022 1,013; 2023 1,062; 2024 1,085; 2025 1,200; 2026 1,308. - Exports of services (Millions of Euros): 2020 258; 2021 245; 2022 543; 2023 661; 2024 768; 2025 791; 2026 823. - Imports of services (Millions of Euros): 2020 192; 2021 194; 2022 236; 2023 257; 2024 277; 2025 303; 2026 332. - Balance on primary income (Millions of Euros): 2020 -36; 2021 -24; 2022 -27; 2023 -28; 2024 -48; 2025 -50; 2026 -55. - Balance on secondary income (Millions of Euros): 2020 303; 2021 364; 2022 388; 2023 389; 2024 433; 2025 420; 2026 479. - Financing components: - Capital account (Millions of Euros): 2020 222; 2021 321; 2022 173; 2023 83; 2024 36; 2025 37. - Financial account, net 1/ (Millions of Euros): 2020 -716; 2021 96; 2022 67; 2023 91; 2024 -97; 2025 35; 2026 7. - Direct investment, net (Millions of Euros): 2020 55; 2021 78; 2022 99; 2023 139; 2024 81; 2025 81; 2026 82. - Portfolio investment, net (Millions of Euros): 2020 0; 2021 -100; 2022 0; 2023 0; 2024 0; 2025 0; 2026 0. - Other investment, net (Millions of Euros): 2020 -6; 2021 192; 2022 -32; 2023 -49; 2024 -178; 2025 -79; 2026 -25. - Other other-investment details (Millions of Euros): - Net acquisition of financial assets: 2020 126; 2021 645; 2022 921; 2023 294; 2024 511. - Net incurrance of liabilities: 2020 -491; 2021 581; 2022 343; 2023 -49; 2024 -33; 2025 -15. - Monetary Authority: 2020 -1; 2021 100; 2022 0000. - Central Government: 2020 -309; 2021 331; 2022 -3; 2023 -14; 2024 -31; 2025 -2; 2026 -10. - Disbursements 1/: 2020 101; 2021 336; 2022 974; 2023 711; 2024 0098. - Amortization: 2020 -41; 2021 -39; 2022 -38; 2023 -88; 2024 -102; 2025 -103; 2026 -108. - Exceptional financing: 2020 0; 2021 0; 2022 0; 2023 0; 2024 0; 2025 0; 2026 0. - Commercial Banks: 2020 439; 2021 20; 2022 -6; 2023 -6; 2024 -27. - Non-bank flows: 2020 -2; 2021 124; 2022 -386; 2023 3; 2024 -12; 2025 -29; 2026 -12. - Errors and omissions 2/ (Millions of Euros): 2020 25; 2021 29; 2022 -2; 2023 -22; 2024 -100. - Overall balance (Millions of Euros): 2020 -206; 2021 109; 2022 273; 2023 342; 2024 5. - Financing (Millions of Euros): 2020 206; 2021 -10; 2022 -24; 2023 -46; 2024 -44; 2025 -18; 2026 -30. - Change in reserves (-:=increase, excl. ECF and RSF) (Millions of Euros): 2020 75; 2021 -10; 2022 -24; 2023 -46; 2024 -44; 2025 -18; 2026 -30. - Loans (Multilaterals excl. IMF) (Millions of Euros): 2020 131; 2021 0; 2022 0; 2023 0; 2024 0; 2025 0; 2026 0. - Financing gap (Millions of Euros): 2020 0; 2021 0; 2022 -14; 2023 -19; 2024 -11; 2025 -14; 2026 -6. - Use of ECF (Millions of Euros): 2020 0; 2021 0; 2022 14; 2023 19; 2024 11; 2025 14; 2026 6. - Residual Gap (Millions of Euros): 2020 0; 2021 0; 2022 0; 2023 0; 2024 0; 2025 0; 2026 0. - Memorandum items: - Targeted reserves path as months of prospective imports: 2020 7.4; 2021 5.7; 2022 5.7; 2023 6.0; 2024 5.9; 2025 5.6; 2026 5.4. - Use of Fund credit: RSF: 2020 0; 2021 0; 2022 6; 2023 13; 2024 10. - Notes: Source: Cabo Verdean authorities and IMF staff estimates. - 1/ Includes reserves and exceptional financing. - 2/ Including banks' delays on trade credits reporting. ### Macroeconomic outlook and risks - GDP projection for 2025: 5.2 percent. - Potential growth: 4.8 percent. - Inflation: around 2 percent. - Expected moderate current account deficit driven by higher climate spending and softer tourism and remittances growth. - Key external and fiscal risks: trade tensions, financing uncertainty, and climate shocks. - Reserves: described as adequate. - Contingency focus: diversification, resilience, and social protection. - Upside potential: tourism may provide upside potential. ### Fiscal performance and public finances (2025) - Fiscal performance in 2025: expected to be strong and aligned with debt reduction goals, targeting a stronger primary balance. - Tax revenue: expected to increase due to lower tax exemptions and other preferential tax treatment and ongoing tax reforms. - Spending: capital and current spending will rise, but total primary spending will remain below earlier forecasts. - Non-tax revenue: adjusted to exclude one-off transfers. - Property income: projections are being reassessed. - Financing mix: growing financing needs will be met primarily through external sources, with reduced reliance on domestic borrowing. - Institutional arrangements: An MoU between the MoF and BCV details the institutional onlending arrangements. ### Monetary policy and financial stability - Monetary policy stance: continued tightening cycle to protect the exchange rate peg and build reserve buffers. - Policy rate differential: recently turned positive. - Banks’ deposits abroad: resumed upward trend in 2025Q1. - Recommendation: adjusting forward rate guidance so the BCV targets a BCV-ECB interest rate gap more consistent with pre-pandemic norms would be appropriate. - Financial stability risks from higher interest rates: seen as limited at this stage given limited monetary policy passthrough. - Policy preference for emerging risks: best addressed via macroprudential measures. ### Program implementation and reform priorities - Program performance under the ECF: - All end-December 2024 QPCs and all continuous PCs were met. - Indicative Target (IT) for social spending at end-December 2024 was not met, albeit by a small margin. - All Structural Benchmarks (SB) due end-December 2024 were met. - RSF performance: relatively weak; RMs under the RSF have been progressing but more slowly than expected; none of the six RMs have been completed under this review despite efforts and ongoing CD support. - Reform focus: - Enhance productivity, foster sustainable growth, and strengthen resilience to shocks, particularly climate-related shocks. - PEDS II strategy: expand financial access and improve the overall business climate. - Climate transition measures under the RSF: reforms in the energy and water sectors, emphasizing infrastructure upgrades, cost reduction, and private sector development. - Social initiatives: prioritize poverty alleviation, promoting equity, and protecting vulnerable populations. *Source: Cabo Verdean authorities and IMF staff estimates.* ### 40. Staff supports the completion of the sixth review under the ECF arrangement, the ### 1cpvea2025002-source-pdf - 40. ### Program decisions and staff support - Staff supports the completion of the sixth review under the ECF arrangement, the extension and augmentation of the ECF arrangement, as well as the extension of the RSF arrangement. - Staff supports the rephasing of the availability dates for delayed RMs 4, 5, 6, 7, 8 and 9 under the RSF arrangement and the modification of RM6. ### Recent economic developments and outlook - Real GDP growth: continued strong growth in 2024 reflecting record tourism arrivals and a continued recovery in the Services sector. - Key drivers supporting reserves: FDI, tourism and remittances helped support reserves despite bank outflows. - Headline inflation: remains low. - Credit and fiscal interaction: Credit to the government held steady due to strong fiscal performance. Key time-series and level indicators (as presented) - Tourism arrivals: record levels in 2024 (time series shown 2008–2024; chart labeled "Tourism arrivals (thousands)"). - Gross international reserves: expressed in months of prospective imports of goods and services (series shown 2008–2025 Proj.). - Credit to the economy: series shown 2013–Nov. 2024. - Consumer price index (end of period) and Core Inflation (end of period): series shown Mar-10 to Mar-25. ### External sector developments - Current account: Strong tourism revenues and weaker capital goods imports led to a current account surplus in 2024. - Financial account: Turned positive in 2024 due to strong banks’ deposit outflows. - Tourism receipts: record tourism arrivals in 2024 resulting in a steady increase in tourism receipts. - Remittances: stabilized in 2024 and remained an important source of foreign currency supporting reserves. - Selected external indicators (figures/series included): - Financial account composition: FDI, Portfolio investment, Other investments (percent of GDP, series 2009–2024). - Tourism receipts (Millions of Euros) and tourism receipts in percent of total exports (RHS). - Remittances (Percent of GDP, series 2009–2024). - Current account balance (Percent of GDP, goods/services/primary/secondary income components, series 2009–2024). - Gross reserves (Millions of Euros) and gross reserves in months of prospective imports (RHS). ### Fiscal sector developments and projections - Fiscal performance in 2025 is projected to be consistent with the program path. - Tax-to-GDP ratio: recorded an all-time high in 2024 and 2025. - Expenditures: projected to increase due to higher capital spending and current expenditure growth related to the expansion of goods and services and wages. - Net other liabilities: projected to be stable in 2025, constraining government support to SOEs. - Financing needs: projected to increase at the margin. - Fiscal time series and projections (figures/series included): - Revenue, Expenditure, Overall deficit, Primary balance, Cyclically adjusted primary balance (Percent of GDP, 2009–Proj. 2025). - Revenue composition: Tax revenue, Non-tax revenue, Grants (Percent of GDP, 2009–Proj. 2025). - Expenditures: Current expenditures and Capital expenditures (Percent of GDP, 2009–Proj. 2025). - Current expenditures composition: Wages and salaries, Goods and services, Interest, Subsidies, Current transfers, Other current expenditure (Percent of GDP, 2009–Proj. 2025). - Net Other Liabilities (Percent of GDP, 2009–Proj. 2025). - Financing Needs (Percent of GDP, 2009–Proj. 2025). Budget credibility findings (2022–24) - Fiscal deficits have been significantly smaller than anticipated in the budget during 2022-24. - Revenues fell slightly short of budget projections overall, with tax revenue falling somewhat below budget projections except in 2024; grants consistently underperformed. - Current expenditures: recorded a budget execution rate of around 90 percent. - Capital spending: shortfalls were a key driver behind the better-than-expected fiscal deficit performance. ### Monetary and financial sector developments - Broad money: At end August 2024 broad money increased due to the increase of net foreign assets. - Credit: Credit to the economy increased despite the gradual phasing out of the COVID-19 relief measures. - Credit-at-Risk: has been increasing since 2022. - Bank deposits abroad: a large interest rate differential during most of the year led to increasing bank deposits abroad; the central bank has closed the interest differential with the ECB rates. - Nonperforming loans: increased in Q3 2024, with concentration in the transport, real estate and tourism sectors. - Financial indicators and series (figures/series included): - Broad Money and Counterparts: Net Foreign Assets, Net Domestic Assets, Broad Money (Annual change in percent of broad money). - Credit to the Economy and Deposits: Excess reserves to total deposits; Credit to the economy (y.o.y growth, RHS); Total deposits (y.o.y growth, RHS). - Credit-at-Risk to Total Credit (percent). - Policy Rate and other Money Market Rates: 6m T-bill rate, BCV policy rate, Bank Deposit Rate, Bank Lending Rate (rhs). - Non-performing Loans and Provisions: Nonperforming loans to total loans (LHS) and Provisions to nonperforming loans (RHS) (quarterly series through 2024Q4). - NFA - Commercial Banks EOP Balance (millions of CPV escudos), series 2010–Mar. 2025. Selected banking sector indicators (Table 5 excerpts, end-period values) - Regulatory capital to risk-weighted assets: values shown quarterly 2020Q4–2024Q4 (e.g., 19.4 in 2020Q4; 23.9 in 2024Q4). - Nonperforming loans to total loans: series includes values such as 9.5 (2020Q4), 7.9 (2024Q4). - Provisions to nonperforming loans: series includes values such as 86.4 (2020Q4), 63.8 (2024Q4). - Return on assets and Return on equity: series shown with values across quarters. - Liquid assets to total assets and Liquid assets to short-term liabilities: series shown across quarters. - Additional indicators: Government deposits over total deposits, Demand deposits over total deposits, Total credit over total deposits, Personnel cost over cost of operations (quarterly values through 2024Q4). ### Capacity development (CD) overview - CD spending in CPV is broadly in line with the AFR average, but projected to rise. - CPV is a heavy CD user compared to SDS peers; CD spending is in line with other RSF countries. - FAD has conducted most of the CD delivery under core spending and revenue work streams. - Fund CD is supporting key program objectives in 2024. - CD spending by portfolio workstream and delivery department (FY25 planned values shown): - FAD: 1.5 (USD millions) - MCM: 0.4 - STA: 0.2 - ICDD: 0.1 - LEG: 0.1 ### RSF Reform Measures Matrix — summary of key reforms, status, timing, and expected BoP/fiscal impacts Reform Area 1: Strengthen governance of climate change policy - RM1: Establish a council/body for coordinating climate change policy planning and strategy and DRM under Heads of Government; MAE serves as secretariate. - Status: Completed. Cabinet approved Resolution no 38/2024; published in Official Gazette on May 10, 2024, I Série No 42-1106l. - Timing: End-April 2024; 4th ECF Review. - Prospective BoP/Fiscal impact: Better informed and coordinated policy decisions will improve budget management, reduce costs, improve impact, and maximize multi-pronged BOP risk reduction. Reform Area 2: Improve fiscal and physical resilience to climate change - RM2: Ministry of Finance to conduct and publish quantitative analysis of fiscal risks generated by climate change in the annual Fiscal Risk Statement. - IMF CD input: C-PIMA; FAD delivered CD in July 2024. - Status: Completed. Fiscal Risk Statement published alongside draft 2025 budget sent to parliament. - Timing: End-Sept. 2024; 5th ECF Review. - Impact: Improves fiscal risk management and reduces import demand for reconstruction after shocks. - RM3: Amend PPP legal framework to ensure climate requirements in PPP agreements; publish manual integrating requirements across PPP lifecycle. - IMF CD input: C-PIMA; FAD/LEG CD in March. - Status: Completed. Changes approved by Cabinet in April and published in Official Gazette on May 8, 2024 (Decreto-lei 21/2024, I Série no 40-1012). - Timing: End-April 2024; 4th ECF Review. - Impact: Reduces government contingent liabilities, improves investor confidence, reduces reconstruction needs. - RM4: Adopt national climate finance mobilization strategy and develop/publish a pipeline of appraised public capital projects (including climate-related) as part of the budget process. - IMF CD input: C-PIMA; Luxembourg and follow-up support from FADM2 in 2025. - Status: On track. Climate finance strategy largely complete and presented at COP29; pipeline work ongoing, expected completed up to June 2025. - Timing: End-October 2025; 7th ECF Review. Reform Area 3: Strengthening mitigation and resilience through energy transition - RM5: Determine cost-recovery rate for electricity, identify tariff discrepancies, undertake distributional impact assessment, publish regulations for methodology to adjust tariffs to achieve full cost recovery; regulator to apply by test date. - IMF CD input: CPD; FADEP supported analytical study in December 2024. - Status: On track. Cooperation with international partners advanced; authorities preparing business plans for new business units (EPEC and EDEC). - Timing: End-December 2025; 8th ECF Review. - Impact: BOP resilience to shocks; reduces reliance on fossil fuel imports; improves fiscal and external sustainability. Reform Area 4: Promoting adaptation and water resource sustainability - RM6: Determine cost-recovery rate for water (fully reflecting operational and capital cost), identify tariff discrepancies, undertake distributional impact assessment, publish regulations for adjusting water tariffs to cost-recovery rate, and/or finance infrastructure investment transparently from the budget for sustainability of water sector in Santiago Island. - IMF CD input: CPD; FAD support for tariff review and distributional impact in March 2025. - Status: Authorities setting out investment plans; scope for test date narrowed to Santiago Island. - Timing: End-December 2025; 8th ECF Review. - Impact: Fiscal and external sustainability and resilience; reduces fiscal costs from covering water sector losses. Reform Area 4 continued: Natural disaster risk mapping and land use planning - RM8: INGT or new unit/council for CC management and DRM to develop/disseminate natural disaster risk and vulnerability maps; amend land use planning regulation and construction code requirements to consider disaster risks. - Status: Near completion. INGC working on defining natural disaster and vulnerability maps. - Timing: End-October 2025; 7th ECF Review. - Impact: Reduces need for reconstruction and associated imports/fiscal costs; supports food security and resilience. Reform Area 5: Financial sector resilience to climate change - RM9: BCV to develop a climate information architecture for banks: (1) adopt a climate change adaptation and mitigation taxonomy; (2) publish climate risk/opportunities disclosure guidelines; banks expected to submit internal roadmaps within six months of guideline application and progress reports every six months. - IMF CD input: MCM delivered an online presentation to BCV; MCM to support consultant deliverables and provide bilateral CD as needed. - Status: In progress. BCV engaged an external consultancy. - Timing: TBC End-April 2026; 9th ECF Review. - Impact: Reduces financial sector losses when climate risks materialize, lowering potential bank recapitalization needs. Social protection reform - RM7: Expand the Unique Social Registry (USR) to 100 percent coverage of poor and vulnerable households (including rural) based on the latest household budget survey, and offer inclusion to 100 percent of households in climate vulnerable areas. - Status: Near completion. USR expanded and covers 100 percent of poor and vulnerable households; offering inclusion to climate vulnerable areas dependent on RM8. - Timing: End-October 2025; 7th ECF Review. - Impact: Improves households’ economic resilience, food security, and reduces economic uncertainty in vulnerable areas. ### Debt, balance of payments, and medium-term projections (high-level highlights from tables) - Table 1 (Selected Economic Indicators, 2021–30) includes projections for Real GDP, CPI, exports/imports of goods and services, net foreign assets, broad money, domestic savings and investment, external current account, gross international reserves (months), government finance aggregates (revenue, tax and nontax revenue, grants, expenditure, primary balance, overall balance), net other liabilities, total financing, public debt stock and service, present value of PPG external debt (percent of GDP and percent of exports), and memorandum items such as public debt including domestically guaranteed debt to SOEs and Nominal GDP (billions of Cabo Verde escudos). - Examples of exact projected values shown in Table 1: - Real GDP (Proj. series): 7.0 (Act.), 15.8 (Act.), 5.4 (Proj.), 7.3 (Proj.), 5.0 (Proj.), 5.2 (Proj.), 4.9 (Proj.), 4.9 (Proj.), 4.8 (Proj.), 4.8 (Proj.), 4.5 (Proj.) — presented as a time series (preserve exact formatting in source). - Gross international reserves (months of prospective imports): values shown 5.7, 5.7, 6.0, 5.9, 5.2, 5.6, 5.4, 5.3, 5.3, 5.3, 5.3 (years 2021–2030). - Total nominal government debt: 148.5, 127.2, 115.7, 109.9, 107.1, 104.9, 99.9, 94.1, 88.9, 83.9, 79.4 (percent of GDP across years listed). - Table 2 (Balance of Payments, 2021–30, Millions of Euros) shows detailed current account, trade balance, exports/imports f.o.b., services receipts/payments (including tourism receipts and tourism component), remittances, capital account (including grants), financial account components (FDI, portfolio, other investment), central government disbursements and amortization, gross international reserves levels and months of imports, and memorandum items. - Example values from Table 2: - Current account (incl. official transfers, percent of GDP): -12.1, -3.5, -2.5, 3.7, -2.2, -1.3, -2.4, -3.1, -3.4, -3.5, -3.5 (years shown). - Gross international reserves (end of period, € millions): 595, 626, 686, 736, 715, 759, 799, 839, 889, 942, 1002 (years shown). - Use of Fund credit: ECF and RSF line items included (series shown in millions; e.g., Use of Fund credit: ECF 0,14,19,11,11,14,6,0,0,0,0). - Table 8 (Indicators of Capacity to Repay the Fund, 2025–44) provides Fund obligations (principal, charges and interest, total) under existing credit and under existing and prospective credit, outstanding Fund credit (millions of SDRs and U.S. dollars), percent of exports of goods and services, percent of debt service, percent of quota, percent of gross international reserves, percent of GDP, and Net Use of Fund Credit (millions of SDRs) for 2025–2044. - Example figures from Table 8 (selected): - Fund obligations based on existing credit (millions of SDRs) — Principal by year: 2.4, .7, 5.9, 8.6, 11.0, 10.0, 8.1, 7.0, 4.3, 2.1, 1.1, 0.8, 0.8, 0.8, 0.8, 0.8, 0.8, 0.8, 0.8, 0.5 (presented as time series in source). - Outstanding Fund credit (Millions of SDRs): 84.5, 92.4, 86.6, 78.0, 67.0, 56.9, 47.2, 37.9, 31.3, 26.9, 23.5, 20.9, 18.6, 16.2, 13.8, 11.5, 9.1, 6.7, 4.3, 2.2 (series 2025–2044 in source). - Percent of quota for outstanding Fund credit: series includes values such as 356.6, 390.0, 365.2, 329.1, etc. (full series presented in Table 8). ### RSF reform sequencing and timeline (Table 12 highlights) - RSF Reform Areas/Priorities and Reform Measures mapped across reviews and dates: - RM1 (climate governance): Dec-23 to Jun-24 (3rd and 4th ECF Reviews) — completed by End-April 2024. - RM2, RM3: Completed or delivered by Dec-24 (5th ECF Review and earlier). - RM4: On track for End-October 2025 (7th ECF Review). - RM5 and RM6: Targeted for End-December 2025 (8th ECF Review). - RM7 and RM8: Targeted for End-October 2025 (7th ECF Review). - RM9: Targeted for End-April 2026 (9th ECF Review; timing TBC). *Source: Cabo Verdean authorities; and IMF staff estimates and projections as presented in 1cpvea2025002-source-pdf - 40.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural risks - Regional conflicts — Relative Likelihood: Medium; Impact if Realized: High - Description: Intensification of conflicts (e.g., in the Middle East, Ukraine, Sahel, and East Africa) or terrorism disrupt trade in energy and food, tourism, supply chains, remittances, FDI and financial flows, payment systems, and increase refugee flows. - Impact details: - The economy would be hit by disruptions in the supply chain; terms of trade and the tourism sector deteriorate resulting in BoP problems and lower FDI. - Increased 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 domestic tax mobilization for new policies to mitigate supply shocks in the economy. - A shift in tourism to Cabo Verde could also mitigate the impact. - Sovereign debt distress — Relative Likelihood: High; Impact if Realized: High - Description: Higher interest rates, stronger U.S. dollar, and shrinking development aid amplified by sovereign-bank feedback result in capital outflows, rising risk premia, loss of market access, abrupt expenditure cuts, and lower growth in highly indebted countries. - Impact details: - Economic slowdown and reduced growth due to reduced spending on infrastructure and social services. - 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. - Austerity measures, such as cuts to public services, subsidies, or social programs, can lead to public discontent, protests, and political instability, potentially undermining governance. - Policy Response: - Maintain adequate reserves and fiscal consolidation and reliance on concessional financing from bilateral and/or multilateral creditors. - Boost economic growth and diversification. - Stand ready to tighten monetary policy. - Improve social safety nets. - Proactively engage with the public on needed policy measures. - Commodity price volatility — Relative Likelihood: Medium; Impact if Realized: High - Description: Supply and demand volatility (due to conflicts, trade restrictions, OPEC+ decisions, AE energy policies, or green transition) increases commodity price volatility, external and fiscal pressures, social discontent, and economic instability. - Impact details: - 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 - Description: Persistent conflicts, inward-oriented policies, protectionism, weaker international cooperation, labor mobility curbs, and fracturing technological and payments systems lead to higher input costs, hinder green transition, and lower trade and potential growth. - Impact details: - 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 likely 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. - Stay the course on fiscal consolidation and strengthening the monetary policy framework. - Climate change — Relative Likelihood: Medium; Impact if Realized: Medium/High - Description: Extreme climate events driven by rising temperatures cause loss of life, damage to infrastructure, food insecurity, supply disruptions, lower growth, and financial instability. - Impact details: - 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 - Description: Less ambitious and slower fiscal consolidation efforts and delayed SOEs reforms as the economy returns to normal. - Impact details: - Delayed fiscal consolidation efforts and SOEs reforms would undermine macroeconomic stability and hinder the 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 - Description: Delays in structural reforms implementation, particularly in the public enterprises sector. - Impact details: - 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. - Improve authorities’ communication strategy and engagement with different stakeholders. *Source: Annex I. Risk Assessment Matrix (as provided in the content unit).* ### 3. The cyclically-adjusted PB is higher, reflecting a negative, though declining ### 3. The cyclically-adjusted PB is higher, reflecting a negative, though declining output gap during 2022-2026 ### Cyclical factors, one-offs, and fiscal impulse - From 2022 to 2024, cyclical factors pushed the primary balance (PB) downwards by 3.5 percent of GDP. - For 2025 and 2026, the cumulative impact of cyclical factors is close to 1.2 percentage point due to the closing of the output gap. - The total fiscal impulse from 2022 to 2026 is estimated to be around -2.2 percent of GDP. - From 2022 to 2026, one-off factors increased the PB by 3.3 percent of GDP, mainly driven by the first (2023) and second (2025) installments of the one-off airport concession fee. - Note: Since 2023, recurrent airport concession receipts have been near zero due to the new design of the concession framework. ### Program status and requests (Letter of Intent highlights) - The IMF-supported program under the Extended Credit Facility (ECF) and Resilience and Sustainability Facility (RSF) is cited as crucial for BoP management, fiscal consolidation, reserve maintenance, and resilient growth. - Program performance: - All quantitative performance criteria (QPCs) for end-December 2024 were met. - All continuous PCs were met. - The Indicative Target (IT) for social spending at end-December 2024 was not met by a small margin. - All Structural Benchmarks (SB) due end-December 2024 were met. - Disbursement request: Equivalent to SDR 4.5 million under the ECF (or 19 percent of quota). - Additional requests: - A 15-month extension of the ECF arrangement until December 21, 2026. - An augmentation and rephasing of 30 percent of quota (SDR 7.11 million), bringing the total ECF arrangement to SDR 52.14 million. - An extension of the RSF arrangement for the same period and rephasing of RSF availability dates. - Rationale for augmentation: increased BoP needs amid global uncertainty, substantial investment-driven import demand, heightened financing risks, and uncertainty over the Millenium Challenge Corporation (MCC)’s third compact. ### Macroeconomic developments and outlook - Growth and inflation: - Growth in 2024 is estimated at 7.3 percent. - Real growth is projected at 5.2 percent in 2025. - Inflation eased in 2024 and is expected to remain around 2 percent in 2025. - Reserves and external position: - Reserves reached €736 million (5.9 months of imports) by end-2024. - The current account posted a 3.7 percent surplus (first since the pandemic) in 2024, expected to shift back to a deficit as temporary factors fade and investment-related imports rise. - Monetary and financial indicators: - In the May 2025 MPC meeting, the deposit rate was increased by 30 bps to 2.25 per cent. - The policy rate stood at 2.5 percent, representing a positive differential of 10 bps relative to the ECB policy rate (an adjustment from the negative 215 bps in September 2024). - Banks’ net external assets: €84 million at end-2023; €222 million at end-December 2024; €261 million in 2025Q1. - As of March 2025, M2 grew 8.2 percent y-o-y, total deposits 7.6 percent, and credit to the private sector 5.0 percent. ### Fiscal performance, targets, and reforms - 2024 fiscal outcomes: - Tax-to-GDP ratio: 20.1 percent (a 0.9 percentage point increase over 2023). - Tax collection increased by 14 percent y-o-y; overall revenues expanded by 7 percent. - Primary expenditure: 23.4 percent of GDP. - 2024 primary balance: surplus of 1.3 percent of GDP (versus a projected deficit of 0.1 percent at the fifth review). - Public debt trajectory: - Debt-to-GDP decreased from 116.6 percent of GDP in 2023 to 109.9 percent at end-2024. - Expected to decline to 104.9 percent by end-2025. - Program aims for a debt level below 70 percent of GDP by 2034. - 2025–26 fiscal projections and measures: - Primary balance in 2025 projected at 0.5 percent of GDP (improvement from the fifth review projection of 0.4 percent of GDP). - Primary spending in 2025 projected to be 1.3 percent of GDP below the fifth review projections. - Net external financing projected at 1.3 percent of GDP in 2025. - Net domestic financing projected at 0.8 percent of GDP in 2025. - The 2026 budget will be aligned with the ECF-supported program; targeting a primary balance of CVE 3,511 million for 2026. - The primary fiscal balance is expected to improve to a surplus of 1.1 percent of GDP by 2026. - Overall deficit projected to shrink from 1 in 2024 to 0.8 percent of GDP by program end and to reach a zero balance by 2028. - Public debt projected to drop from 115.7 percent of GDP in 2023 to 89 percent by 2028. - Revenue measures and tax reforms: - Measures to boost domestic revenue include enhancing electronic invoicing, modernizing tax arrears collection, cutting customs exemptions related to ECOWAS implementation, harmonizing tobacco, alcohol, and fuel taxes. - Commitment to submit to parliament a reform of the VAT code by end-June 2025. - A reduced CIT exemption on large investment imports and the VAT 2025 reform are expected to further expand the tax base in 2026. - Projected a 1.7 percent of GDP decline in current primary expenditures in 2026 from 2025 to offset the phasing out of the 2025 airport concession fee. - Medium-term structural primary balance projected to stabilize near 1.3 percent of GDP. - Public investment and expenditure management: - Measures to improve public investment efficiency per IMF TA: redefine thresholds, implement a pre-screening system, use multi-criteria analysis for prioritization, adopt a pre-implementation checklist. - Medium-term primary spending expected to stabilize around 25 percent of GDP, with the wage bill at about 9 percent. ### Fiscal risks from SOEs and governance measures - SOEs are identified as a major fiscal risk, with losses—especially in transport—continuing to burden public finances. - Ongoing and planned actions: - Unbundling of Electra backed by the World Bank. - Enforcing timely publication of audited financial statements of key SOEs. - Privatization initiatives in airport logistics, the energy sector, and pharmaceutical SOEs; advancing work on ports concessions. - A comprehensive approach needed for inter-island air transport, including addressing the loss-making TACV airline. - Debt management measures: - Memorandum with Portugal on debt-for-climate swaps. - Updated debt legislation aligned with the 2018 review. - Revised guarantees law establishing a fund financed by beneficiaries to mitigate noncompliance risks. ### Monetary policy framework and financial sector resilience - Policy stance and objectives: - Monetary policy focused on safeguarding the peg, backed by strong external buffers. - The BCV tightened policy and aligned rates with the ECB; deposit rate and policy rate adjustments noted above. - Interest rate gap with the euro area has become slightly positive. - Financial stability and supervision: - High levels of NPLs, particularly in transport and construction, require monitoring. - Stress tests show resilience to simple shocks but highlight vulnerabilities due to sovereign exposure and portfolio concentration. - Plans to update prudential provisioning guidelines to align with regional standards and IMF recommendations. - Excess liquidity and instruments: - Banking system faces substantial excess liquidity due to limited domestic lending opportunities, reduced reserve requirements, and pandemic-related injections. - Proposed actions: gradually restore reserve requirements to pre-pandemic levels; increase the share of INPS assets invested abroad gradually and in coordination with the BCV; strengthen open market operations and sterilization efforts. - Monitoring and technical initiatives: - BCV enhancing analysis of monetary policy transmission and short-term forecasts. - BCV and Ministry of Finance, together with the World Bank, working on a national fintech strategy to foster innovation, competition, and reduce transaction costs. *Source: Letter of Intent, Praia, June 24, 2025.* ### 21. We are committed to modernizing the financial system to promote inclusive growth ### 21. We are committed to modernizing the financial system to promote inclusive growth ### Financial system modernization and supervision - Key priorities: - Reviewing core financial legislation. - Monitoring emerging technologies and cyber risks. - Training BCV staff on IFRS 17 to enhance oversight of the insurance sector. - Strengthening oversight and resilience: - Increased frequency of stress testing. - Upgraded risk assessment tools. - Plan to incorporate climate-related risks in 2026. - Efforts underway to strengthen the bank resolution framework. ### BCV safeguards and governance reform - Implementation status: - BCV is implementing recommendations of the 2022 safeguards assessment. - Amendments to the BCV Organic Law await final parliamentary approval, following its approval in generality in May 2025. - Objectives of the proposed new law (consistent with IMF recommendations): - (i) establish an independent oversight process that is separate from executive management; - (ii) strengthen the personal autonomy of BCV’s key officials and the financial autonomy of the BCV; - (iii) enhance transparency and accountability mechanisms. - Commitment: - Competent authorities remain strongly committed to bringing the proposal to a final vote in the National Assembly as soon as possible. - BCV remains committed to implementing outstanding safeguards recommendations. ### AML/CFT/CPF framework strengthening - Recent progress (in line with the National Strategy (ENCAVE)): - General approval by the National Assembly, in February of 2025, of the draft amendment to the law establishing preventive and punitive measures to combat money laundering, financing of terrorism, and the financing of weapons of mass destruction proliferation. - Preparation by the Interministerial Commission of a draft legal framework on Ultimate Beneficial Ownership (UBO). - Establishment, in April 2025, of a dedicated unit within the Bank of Cabo Verde to oversee AML/CFT/CPF supervision independently from prudential supervision. - Regulatory impact: - New legal framework reinforces authority and obligations of regulatory and supervisory bodies, particularly in relation to oversight of Designated Non-Financial Businesses and Professions (DNFBPs). - Next steps: - With approval of the new law, competent authorities must focus on finalizing its regulation and ensuring practical implementation to enhance effectiveness of the AML/CFT/CPF system. ### Monetary and financial statistics improvements - Alignment with IMF standards: - Since 2024, working towards alignment of BCV’s published data with IMF standards using the 2016 IMF Monetary and Financial Statistics Manual. - Key activities and structural benchmarks (SBs): - Improving methodologies and working files. - Moving towards an integrated database system. - Ongoing improvements to include better credit data by economic activity, using INE’s classification (another SB). ### Broad structural reforms for private-sector-led growth - Macroeconomic and fiscal measures: - Improve tax compliance and reduce exemptions to broaden the revenue base. - Keep wage growth below nominal GDP and limit direct procurement to help control costs. - PEDS II strategy priorities: - Better access to finance, a stronger business environment, and private-sector-led diversification. - SME-friendly reforms and lowering costs of finance, electricity, water, and transport. - Key diversification areas: integrated tourism, and the blue and digital economies. - RSF-supported reforms aim to boost private climate finance in line with PEDS II. ### Business environment, legal procedures, and land titling - Streamlining legal procedures for businesses: - Reduce waiting times and improve connections with judicial processes. - Focus on land titling: unclear ownership delays investment. - Digitalize information for easier access to help resolve disputes more quickly. ### Social protection and support to vulnerable households - Social safety net expansion: - Cash transfers to the poorest have increased, funded by the Social Protection Fund. - Ministry of Family and Social Inclusion has expanded the Unique Social Registry to cover all poor and vulnerable households, aiding design and delivery of measures to mitigate climate-related policy impacts. ### Climate policies, targets, and RSF support - Climate targets: - Cut greenhouse gas emissions by 18 percent by 2030. - Reach net zero by 2050. - Advance renewable energy production, service access, and climate-resilient investment. - RSF support and objectives: - RSF supports climate governance, resilience, energy efficiency, water sustainability, and financial sector adaptation. ### RSF Reform Measures (RMs): implementation status and timing - Overall note: None of the six RMs due under the 3rd Review of the RSF have been implemented; capacity constraints have created implementation challenges. - RM4: - FAD will provide further support once pipeline of public capital projects is finished. - RM completion delayed to October 2025. - RM5: - FAD CD in December 2024 identified missing information for calculating the cost-recovery tariff at required disaggregation levels, including separate accounting data for electricity generation, electricity distribution, water desalination, and on subsidies provided to Electra. - RM completion delayed to December 2025. - RM6: - FAD delivered TA in March 2025 on water subsidy reform. - Multiple utility SOEs across islands complicate cost-recovery tariff calculation; recommendation to narrow scope to Santiago Island. - Completion delayed to December 2025. - RM7: - USR expanded to 100 percent of poor and vulnerable households; inclusion of households in climate-vulnerable areas ongoing. - RM expected to be completed by October 2025 (additional work needed, including completion of RM8). - RM8: - INGT completed natural disaster risk and vulnerability maps showing regional exposures; in process of amending land use planning and construction code requirements to consider disaster risks and vulnerabilities. - RM expected to be completed by October 2025. - RM9: - BCV hired a consultant to develop climate information architecture, taxonomy, a publication of climate risk and opportunities, and disclosure guidelines for banks to submit internal roadmaps. - MCM ready to review consultant’s work and provide direct assistance to BCV as needed. - Completion delayed to April 2026. ### Financing, program monitoring, and review schedule - Monitoring framework: - Program monitored through proposed quantitative performance criteria, indicative targets, and structural benchmarks (Table 1 and 2). - Technical Memorandum of Understanding (TMU) describes definitions and data provision requirements. - Program review schedule: - Seventh program review scheduled to be completed by October 2025 (based on end-June 2025 test date). - Eighth program review scheduled to be completed by March 2026 (based on end-December 2025 test date). - Nineth program review scheduled to be completed by October 2026 (based on end-June 2026 test date). - Program will continue with monitoring by the IMF Executive Board on a semi-annual basis. - RSF monitoring: - Under the RSF, monitoring will be done by means of the reform measures. - RM4, RM5, RM6, RM7, RM8 and RM9 will be completed and reviewed in the next reviews under the extension period under the RSF arrangement. *Source: 1cpvea2025002-source-pdf - 21. We are committed to modernizing the financial system to promote inclusive growth* ### 1. Program exchange rates are used for formulating and monitoring quantitative ### Program exchange rates are used for formulating and monitoring quantitative performance criteria. ### Exchange Rates - All assets and liabilities denominated in U.S. dollars (USD) will be converted into escudos at a program exchange rate of CVE 98.8 per one USD. - Assets and liabilities denominated in SDRs and in foreign currencies not in USD will be converted into USD at the exchange rates reported in Table 1. ### QUANTITATIVE AND CONTINUOUS TARGETS — A. Floor on the Primary Balance of the 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. - Definition: central government primary balance = total tax and non-tax revenues and grants minus primary expenditure; covers non-interest government activities as specified in the budget. - Measurement: cumulative flow over the calendar year. - Recording conventions: - 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. - Adjustment: the floor of the primary balance will be adjusted upward (downward) by the surplus (shortfall) in disbursements of the grants to the baseline projection. - Reporting: Data provided monthly by the Directorate National of Planning (DNP) of the Ministry of Finance with a lag of no more than six weeks from the end-of-period. ### B. Cumulative Floor on Central Government Tax Revenue - Coverage: tax revenues refer to revenues from tax collection; excludes asset sales, grants, and non-tax revenues. - Purpose: to gauge impact of tax policy reforms and improvements in tax administration. - Measurement: revenue target calculated as cumulative flow from the beginning of the calendar year. - Reporting: Data provided monthly by the DNP with a lag of no more than six weeks from the end-of-period. ### C. Floor on Net Other Liabilities - Definition: Net Other Liabilities = sum of loans to SOEs and municipalities (onlending) and capitalization. - Measurement: floor measured cumulatively over the calendar year. - Onlending: domestic and external loans contracted by central government and onlent to SOEs; net onlending = disbursement of these loans minus repayment by SOEs to the central government (reflected with an inverted sign in total Net Other Liabilities). - Capitalization: capital injection or equity participation by central government into corporations (reflected with an inverted sign in total Net Other Liabilities). ### D. Ceiling on Net Domestic Financing (NDF) of the Central Government - Definition: NDF = (i) net position vis-à-vis the central bank and commercial banks (difference between government’s claims and debt) plus (ii) financing via issuance (net of redemptions) of securities to individuals or legal entities outside the banking system. - Targets: 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. - External budgetary assistance: defined as budget loans, grants and non-earmarked debt relief operations (excluding project-related loans and debt relief under HIPC and MDRI Initiatives); includes budget support loans from IMF, World Bank, AfDB, European Union and others. - Adjustors: - If external budgetary assistance exceeds program projections (cumulative since January 1), NDF ceiling adjusted downward at end of quarter. - If external budgetary assistance falls short of projections (cumulative since January 1), NDF ceiling adjusted upward while respecting limits in the Budget law. - NDF ceiling adjusted upward (downward) by shortfall (surplus) in privatization proceeds relative to program projections. - Reporting: data provided quarterly by DNP with a lag of no more than six weeks from the end-of-period; DNP and BCV provide monthly data (net position to banking system) with a lag of no more than six weeks from the end-of-period. ### E. Non-Accumulation of Domestic Payments Arrears - Commitment: government will not accumulate any new domestic payments arrears; monitored via monthly execution of cash-flow plan and release of budget appropriations. - Definition for arrears: - Domestic payment obligation to suppliers deemed in arrears if not paid within normal grace period of 60 days (30 days for government salaries and debt service), or other period specified by budget law or contract, after verified delivery of goods/services, unless amount/timing subject to good faith negotiations. - Reporting: DNP to submit quarterly detailed table of stock of domestic payments arrears (accumulation, payment, rescheduling, write-off) within six weeks after quarter end. ### F. Ceiling on the PV of New External Concessional Debt of the Central Government - Coverage: ceiling applies to PV of new external debt contracted or guaranteed by the public sector with original maturities of one year or more; includes private debt with official guarantees; applies to debt for which value has not yet been received. - Adjustor: up to 5 percent of the external debt ceiling (in PV terms) applies when deviations are prompted by a change in financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees); adjustor cannot be applied when deviations are prompted by an increase in nominal amount of total debt contracted or guaranteed. - Definition of external public debt: debt to nonresidents contracted or guaranteed by the central government, comprising external debt of central government and external debt of official sector entities and SOEs guaranteed by central government. - Debt definition: as set out in Point 8(a) of the Guidelines on Public Debt Conditionality (Executive Board Decision No. 16919-(20/103), adopted October 28, 2020), including loans, suppliers’ credits, and leases; arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligation that constitutes debt are debt. - Concessionality: - Debt is concessional if grant element ≥ 35 percent. - Grant element = (PV of debt − nominal value) / nominal value, with PV calculated at contracting by discounting future debt service. - For debts with grant element ≤ 0, PV set equal to nominal value. - Discount rate: unified discount rate of 5 percent (Executive Board Decision No. 15248-(13/97)). - Debt rescheduling and reorganization excluded from limits; new concessional external debt excludes normal short-term (less than one year) import-related financing. - Variable-rate debt PV calculation: - Use program reference rate plus fixed spread specified in debt contract. - Program reference rate for six-month USD LIBOR is 2.699 percent and will remain fixed for duration of 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, spread over six-month USD LIBOR is 100 basis points. - If variable rate linked to a benchmark other than six-month USD LIBOR, add spread reflecting difference between benchmark rate and six-month USD LIBOR (rounded to nearest 50 bps). - TMU can be updated to reflect benchmark replacements (SOFR; SONIA; EURIBOR; TONAR) prior to complete phase-out, once operationally feasible. - Reporting: government will consult Fund staff before assuming liabilities where classification uncertain; details of all new external debt (including government guarantees), indicating terms and creditors, provided quarterly within six weeks of quarter end. ### G. Non-concessional External Debt Contracted or Guaranteed by the Central Government - Coverage: ceilings on medium- and long-term, and short-term non-concessional external debt are quantitative targets; zero ceiling on non-concessional external debt is continuous. - Definition: non-concessional if grant element < 35 percent (grant element calculated as in F). - Discount rate: unified discount rate of 5 percent (Executive Board Decision No. 15248-(13/97)). - Exclusions from definition of non-concessional external debt: - Normal short-term (less than one year) import-related financing. - Portuguese government’s precautionary credit line (the “Portuguese credit line”) supporting the exchange rate peg. - Contracted disbursements derived from additional loan under contract originally signed in 2013 with the Kuwait Fund related to ongoing healthcare sector projects (construction of two hospitals and establishment of first blood testing laboratory in Cabo Verde) — qualifies as exceptional non-concessional borrowing due to development importance and lack of concessional financing; macroeconomic impact negligible. - Reporting: government will consult Fund staff when uncertain whether an instrument falls under quantitative targets; details of all new external debt (including guarantees), terms and creditors, provided quarterly within six weeks of quarter end. ### H. Gross International Reserves (GIR) of the Central Bank - Target: floor on stock of GIR of BCV constitutes a quantitative target. - Definition of GIR: assets readily available (liquid and marketable, free of pledges/encumbrances), controlled by BCV and held for balance of payments needs and FX market intervention; include gold, SDR holdings, reserve position at IMF, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks, fixed-term deposits abroad liquidatable without penalty, and holdings of investment-grade securities. - Adjustors: 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 adjusters, flows valued at current exchange rates. - Reporting: BCV will transmit a table on GIR monthly with a maximum delay of four weeks. ### I. Non-Accumulation of External Payments Arrears - Commitment: government will not accumulate any new external payments arrears; continuous target; monitored via monthly execution of cash-flow plan and release of budget appropriations. - Definition for program monitoring: external payments arrears = amount of external debt service due and not paid within contractually agreed period, subject to any applicable grace period, including contractual and late interests; arrears resulting from nonpayment for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded. - Reporting: data on (i) debt-service payments; and (ii) external arrears accumulation and payments transmitted quarterly by DNP within six weeks of quarter end; government will inform Fund staff immediately of any accumulation of external arrears. ### J. Memorandum Item: Floor on Central Government Social Spending - Coverage: indicative floor applies only to expenditures incurred by central government on specified plans and programs intended to have a positive impact on education, health, and social protection, excluding wages and salaries component. - Measurement and reporting: measured as cumulative over the fiscal year; reported quarterly by DNP with a lag of no more than six weeks from end-of-period. ### K. RSF Reform Measures - (Section heading present; source content does not provide further text under this subsection within the supplied extract.) *IMF Staff Report extract: Cabo Verde — program rules for exchange rates, fiscal and debt-related quantitative targets and reporting requirements.* ### 32. Cost recovery tariff under RM 5 and 6 should reflect the capital cost of ### 32. Cost recovery tariff under RM 5 and 6 should reflect the capital cost of ### Cost recovery tariff (RM 5 and RM 6) - Cost recovery tariff under RM 5 and 6 should reflect the capital cost of infrastructure and the operational cost. - Infrastructure cost will cover: - the investment as needed during the transition, as well as the maintenance and replacement based on the useful life of such infrastructure. - Operational cost will reflect the current and target energy mix. ### Climate vulnerability information (RM 8) - Climate vulnerability information under RM8 will cover: - maps on vulnerability to sea-level rise projection based on identified climate scenarios with full coverage of territory; - climate vulnerability maps for the seven (seven out of 22) most populated and/or most climate vulnerable municipalities; - maps including information on the occurrence of past climate hazards with additional information on the expected implications of climate change as implied by the 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 the related regulations, - and the Technical Building Code (Order 4/2012). ### Other data requirements and assessment of achievement of reform targets - Data transmission timelines: - Data on exports and imports, including volume and prices and compiled by the Director of Customs and the BCV, will be transmitted on a quarterly basis within five weeks after the end of each quarter. - A preliminary quarterly balance of payments, compiled by the BCV, will be forwarded within six weeks after the end of each quarter. - Annual transmissions (within three months after the end of the following year — 15 months after the closing date): - The Statement of Other Economic Flows as defined in the IMF Manual GFSM2001 or GFSM2014 relative to holding gains/losses of the previous year with ASA, Electra, EMPROFAC, ENAPOR, and IFH. - The consolidated balance sheet of ASA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year. - Reform targets and assessment criteria: - Pre-announce a schedule for TIM and TRM auctions reform target — assessed as achieved when the pre-announcements are posted on the central bank website. - Introduce a composite indicator of economic activity reform target — assessed as achieved when the central bank has released the composite indicator. - Carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium — assessed as achieved when the study is completed and released. - Develop a common framework for the resolution of the crisis related NPLs — assessed as achieved when the common framework is complete and released. (The common framework is being developed jointly by the BCV and the World Bank.) - Construct a Compliance Risk Management (CRM) system to allow for the optimization of tax revenue collection — assessed as achieved when the MOF provides staff with a copy of methodology. - Increase the frequency of stress testing to twice per year — assessed as achieved when the central bank provides the findings of the second annual stress test. - Develop and publish an action plan to reduce tax expenditures — assessed as achieved when the MOF provides staff a copy of the approved action plan. - Implement the action plan on tax expenditures in the 2026 budget — assessed as achieved when the MOF provides staff a copy of the approved 2026 budget with the specification of the actions and impacts. - Publish in the SOE report measurable metrics between the MOF and the 6 largest SOEs on financial performance — assessed as achieved when the report is published in the MOF webpage. ### Statement by Cabo Verde authorities — recent economic developments and outlook - Statement date and signatories: - Statement by Mr. André Roncaglia, Executive Director for Cabo Verde, Mr. Filipe Antunes, Alternate Executive Director, and Mr. Pedro Miranda, Senior Advisor to the Executive Director — July 9, 2025. - 2024 performance: - Economic activity grew 7.3 percent. - Headline inflation at end-2024: 1.4 percent year-over-year. - Core inflation at end-2024: 1.6 percent year-over-year. - Current account at an all-time high surplus of 3.7 percent of GDP. - Drivers of overperformance: - Record tourist arrivals, robust exports, private consumption growth. - Sharp expansion in fish exports and robust remittances. - Financial sector described as well capitalized, profitable and liquid. ### Outlook and risks - Growth and inflation: - Growth is expected to gradually moderate towards the potential growth rate. - Inflation is projected to remain around 2 percent over the medium term, in line with euro area trends. - Current account: - Expected to converge towards a deficit of about 3.5 percent over the medium-term, as capital expenditures on climate and infrastructure pick up. - External and climate risks: - Subject to substantial external risks including commodity prices, global trade tensions, increased uncertainty regarding external financing, and climate-related risks such as rising sea levels and extreme weather events. ### Program performance under the ECF and RSF - ECF performance: - All quantitative performance criteria for this review were met, as were the continuous performance criteria. - The 2024 primary balance recorded a surplus of 1.3 percent of GDP, compared to a projected deficit of 0.1 percent. - International reserves resumed upward trend, comfortably exceeding the target and covering 5.9 months of projected imports. - Indicative target for social spending was not met by a small margin. - Structural benchmarks related to tax expenditures and adoption of a 2025 budget consistent with program parameters were met. - RSF progress: - Progress on ambitious reforms under the RSF was slower than foreseen, though authorities remain committed to the climate agenda. - Authorities are requesting a program extension to provide more time to complete remaining reform measures. ### Fiscal and debt policies - Fiscal outcomes: - Tax revenues reached 20.1 percent of GDP in 2024. - The public debt-to-GDP ratio continues to decline and is expected to fall below pre-pandemic levels by end-2025. - Authorities undertaking measures including the formation of a new tax authority with Fund support. - SOE and sectoral reforms: - New structural benchmarks on the timely publication of audited financial statements from all SOEs. - Ongoing reforms in energy and water sectors; restructuring or divesting some public enterprises. - Water sector reform measure scope proposed to be narrowed to the island of Santiago, where most sectoral losses are accrued. ### Monetary and financial policies - Monetary policy: - Focus on preserving the fixed peg exchange rate regime. - The Banco de Cabo Verde (BCV) has fully closed the policy rate gap with the ECB, in line with prior forward guidance. - BCV to continue communicating clearly with markets and making data-driven policy decisions. - BCV improving statistical databases with Fund support. - Financial sector resilience: - Banks profitable with strong capital and liquidity buffers; regulatory capital at end-2024 equaling 23.9 percent of risk-weighted assets (regulatory minimum 12 percent). - Amendments to the Organic Law of the BCV approved in an initial parliamentary vote in May; awaiting final parliamentary approval. - Steps to strengthen macroprudential policy framework, including creation of a new Credit Registry Platform. - AML/CFT improvements: amendments advanced in Parliament in February and establishment of a separate BCV unit for AML/CFT supervision in April. ### Growth strategy and climate resilience reforms - Development strategy and PEDS II (2022-2026) priorities: - Increase potential growth and economic resilience, create quality jobs for youth, reduce poverty. - Priorities include improving the business environment and access to finance, investment in the digital economy, connectivity, and the blue economy. - RSF climate focus: - Strengthening climate governance, increasing physical resilience, enhancing energy efficiency, promoting water sustainability, building financial sector resilience to climate change. - Progress described as well advanced for: natural disaster risk and vulnerability maps, expansion of the social registry, adoption of a national climate finance strategy, and development of a pipeline of appraised public capital projects. - Progress on complex reforms for electricity and water provision sectors with Fund and development partner support. - BCV progress on development of a climate information architecture for banks; MCM engagement to provide capacity development. ### Concluding remarks - Authorities are requesting: - an extension and augmentation of the ECF arrangement, - and an extension of the arrangement under the RSF. - Purpose of extensions: - ECF extension to provide continued concessional financing and policy guidance to maintain debt sustainability, strengthen monetary policy framework, and address long-term structural challenges. - RSF extension to provide more time to complete climate adaptation and transition reforms. - Overall assessment: - Economic performance strong and significant reforms implemented, but major challenges remain to ensure long-term macroeconomic stability, boost potential growth, improve social welfare, and increase climate resilience. - Authorities count on continued Fund support to pursue these policy goals. *CABO VERDE — INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1cpvea2025002-source-pdf.pdf_