## Cape Verde — IMF staff report content unit _cr06334 ## Source details **Canonical URL:** [Cape Verde — IMF staff report content unit _cr06334](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06334.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06334.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06334.pdf.json) --- ### Executive summary — recent performance and macro stability - Growth averaged around 5 percent since 2000, with growth estimated at nearly 6 percent in 2005. - The 2005 MCA grant is for US$110 million (around 11 percent of GDP), to be spread over 4–5 years. - CPI developments: - The CPI rose by 7.4 percent in the year to May 2006; excluding higher food prices and increases in regulated petroleum prices, the CPI increased by only 0.6 percent. - CPI inflation: 0.5 percent in the month of June 2006 and 7 percent in the year to June. - Real effective exchange rate: depreciated by 0.1 percent in the year to April 2006; real effective exchange rate has depreciated by more than 6 percent over the last three years. - International reserves: rose from 2.4 months of prospective imports in 2004 to 3.0 months in December 2005; gross international reserves in millions of euros: 2000: 30.4; 2004: 102.4; 2005: 147.5; series in projections include 76.1; 74.1; 102.4; 147.4; 166.4; 187.1; 210.1; 233.0. - External current account deficit: fell from over 14 percent of GDP in 2004 to 4.6 percent in 2005. ### Fiscal developments, public debt, and arrears - Fiscal stance and 2005 outturn: - Fiscal deficit reached 5.1 percent of GDP in 2005, mainly reflecting increased provision of concessional external loans and delayed disbursement of budget grants. - Sales of government financial and nonfinancial assets enabled net domestic borrowing, excluding for arrears clearance, to decline to -0.2 percent of GDP. - Public debt and domestic debt: - Domestic debt (including arrears, net of deposits) was around 33 percent of GDP at end-2005. - External government debt (measured in domestic currency): series include 56.4, 57.5, 54.0, 55.4, 52.4 (2002–06). - Arrears and clearance: - Total net central government cross-debt to municipalities, INPS, and public/parapublic enterprises: CVEsc 5.9 billion. - Government agreed to settle CVEsc 4.8 billion (equivalent to 5.5 percent of GDP); the rest is disputed. - Agreed arrears settlement: 4.8 billion CVEsc to be settled in several installments; 2006 arrears clearance budgeted at 1.7 percent of GDP (one-third of end-2005 stock). - Spending pressures: - Government wage bill increases from promotions and hiring of security personnel and teachers toward end-2005 are creating fiscal pressures. ### External sector, reserves objective, and financing - External flows and trade: - Exports of goods and services grew by 20 percent from 2004 to 2005; imports grew by only 0.5 percent in nominal terms (2005). - Current account (percent of GDP): 2005 -4.6; 2006 -6.9; 2007 -10.0; 2008 -11.0; 2009 -11.5 (projections). - Reserve accumulation target: - Medium-term program aims to increase reserve coverage by 0.1 months of prospective imports per year (equivalent to about ½ percent of GDP). - Reserve buildup rationale balances import coverage, short-term debt coverage, and base money coverage (Box 3 indicators). - External financing and risks: - Cape Verde attracted sizable inflows from private and official sources, supporting investment and development. - Country-specific reserve factors: official aid inflows about 10–13 percent of GDP; remittances and private transfers about 20 percent of GDP; emigrant deposits around 30 percent of GDP and 40 percent of broad money. ### Monetary policy, banking sector, and liquidity - Liquidity and reserve requirements: - Excess bank reserves increased due to strong net foreign exchange inflows, lower reserve requirements, and slowed private credit growth. - Primary reserve requirement reductions: 19 percent → 18 percent (Nov 2004) → 17 percent (June 2005) → 15 percent (March 1, 2006). - Treasury bill rates declined from 5.0 percent in April 2005 to 2.0 percent in April 2006. - Banking sector structure and indicators: - Total banking sector assets grew by 20 percent since end-2004 to reach over 90 percent of nominal GDP. - Growth concentrated in lending to real estate and construction; emigrant deposits account for over 40 percent of total deposits. - Financial soundness indicators (end-year percent, 2002–05): Regulatory capital to risk-weighted assets: 15, 13.8, 13.3, 12.1; Nonperforming loans to total loans: 7.4, 7.4, 7.2, 6.3; Return on assets (ROA): 1.1, 1.1, 0.7, 0.5; Emigrant deposits over total deposits: ..., 42, 43.2, 41.5. - Financial sector policy actions: - BCV started selling central bank securities to partially absorb excess liquidity. - Task force organized by BCV to guide reforms; commitments to strengthen supervision, apply prudential standards to IFIs, and align AML/CFT legislation with international standards. ### Structural reforms, privatization, and utilities - Privatization and enterprise reform: - TACV national airline: new management selected to restructure in preparation for privatization; TACV restructuring under a one-year consultancy contract beginning June 2006 with privatization expected in 2007. - ENAPOR (port operator): bidding under way; privatization of EMPROFAC, ENAPOR, and INTERBASE expected within 2006. - From forty state-owned enterprises a decade ago, only six remain on the privatization agenda, expected to be completed in 2006–07. - Utilities and tariff reforms: - Fuel subsidies eliminated starting June 1, 2006. - Water tariffs increased by 13.3 percent at end-May 2006; electricity tariffs increased by 25.4 percent at end-May 2006. - June 2005 agreement on tariff deficit: settlement of US$10 million to be paid to Electra in five equal annual installments starting in 2006; additional outstanding government liabilities to Electra about US$5 million (US$2.5 million unpaid bills; US$2.5 million VAT refunds/revenue losses). - Recapitalization: government paid US$3 million; municipalities’ share US$1 million (not included in arrears). Municipal arrears to Electra (excluding recapitalization share) believed around US$3 million. - ARE committed to full implementation of automatic tariff-adjustment mechanism. - Energy policy: - Policy objectives include promoting conservation and alternative energy sources, improving regulatory and institutional frameworks, and implementing automatic tariff adjustments by June 1, 2006. ### Policy Support Instrument (PSI) rationale, design, and priorities - Rationale: - Cape Verde suited to a PSI: macroeconomic stability largely achieved, IMF financial resources not needed, authorities seek close policy dialogue. - Core PSI policy emphases: - Support exchange rate peg by increasing foreign reserve coverage and strengthening monetary policy operations. - Create fiscal space by reducing government debt-to-GDP, better prioritizing expenditures, and rationalizing tax exemptions. - Strengthen public sector management: implement CFAA action plan, MTEF, civil service reforms, and establish a macroeconomic policy unit by December 2006. - Address public service enterprise risks: regulatory framework for energy sector and restructuring TACV and ENAPOR. - Improve business environment: reduce administrative barriers, increase labor market flexibility, strengthen vocational training. - Ensure financial sector development occurs within institutional framework aligned with international best practice. - PSI monitoring and conditionality: - Net domestic borrowing (excluding arrears clearance) would be the operational target; measured exclusive of arrears clearance. - Program monitored by quantitative assessment criteria, structural benchmarks, and semiannual reviews (first review scheduled for November 2006). - Structural assessment criterion: complete implementation of automatic utility tariff adjustment mechanism — Timing: End-September 2006. - Selected structural benchmarks include: complete BCV task force Action Plan (End-September 2006); establish macroeconomic policy unit (End-December 2006); sign information-sharing agreements with home supervisors (End-December 2006); implement MTEF (End-June 2007); submit tax exemptions reform draft (End-June 2007); implement TdC laws and National Chart of Public Accounts (End-June 2007). ### Medium-term projections (key numeric series, 2005–09) - Real GDP (percent change): 2005 5.8; 2006 5.5; 2007 6.0; 2008 6.3; 2009 6.6 - Inflation (annual, percent): 2005 0.4; 2006 6.2; 2007 0.2; 2008 0.3; 2009 2.1 - Central gov't revenues (percent of GDP): 2005 24.1; 2006 25.1; 2007 24.7; 2008 25.2; 2009 25.8 - Central gov't grants (percent of GDP): 2005 7.1; 2006 9.0; 2007 8.9; 2008 9.2; 2009 9.3 - Central gov't expenditures (percent of GDP): 2005 36.3; 2006 41.2; 2007 37.9; 2008 38.4; 2009 38.0 - Central gov't overall balance (percent of GDP): 2005 -5.1; 2006 -7.1; 2007 -4.3; 2008 -4.0; 2009 -2.9 - Central gov't domestic borrowing (1) (percent of GDP): 2005 -0.2; 2006 -1.9; 2007 -0.2; 2008 -0.3; 2009 -0.5 - Central gov't external borrowing (1) (percent of GDP): 2005 3.2; 2006 3.5; 2007 3.4; 2008 3.3; 2009 2.4 - Current account balance (percent of GDP): 2005 -4.6; 2006 -6.9; 2007 -10.0; 2008 -11.0; 2009 -11.5 - FDI (percent of GDP) (2): 2005 2.0; 2006 2.1; 2007 3.4; 2008 4.0; 2009 4.4 - Investment ratio (percent): 2005 37.9; 2006 38.7; 2007 41.2; 2008 43.8; 2009 45.0 - Saving ratio (percent): 2005 33.3; 2006 31.8; 2007 31.3; 2008 32.8; 2009 33.5 - Broad money growth (percent, eop): 2005 15.5; 2006 13.6; 2007 7.4; 2008 7.7; 2009 9.5 ### Reserve, debt, and fiscal targets (medium term) - Reserve accumulation: programmed gross international reserves increase by CVEsc 2.1 million in 2006 and CVEsc 2.3 million in 2007 (to about 3.2 months of prospective imports). - Debt targets: - Program aims to lower central government debt ratio to below 70 percent of GDP by 2009. - Reduce government domestic debt to close to 20 percent of GDP by 2009 (from around 33 percent at end-2005). - Program would create fiscal space growing to around 1.7 percent of GDP by 2009. - Fiscal measures to create space include mobilizing domestic revenue, improving expenditure prioritization, moderately scaling back the wage bill to its 2005 share of GDP, ending petroleum subsidies, and lowering interest costs as debt declines. - The program allows limited government or government-guaranteed external borrowing not meeting the 35 percent concessionality threshold, capped at US$20 million. ### Debt sustainability analysis (DSA) — findings and scenarios - At end-2005: - Total public debt stood at almost 90 percent of GDP. - Interest payments accounted for nearly 10 percent of domestic revenues (2.2 percent of GDP). - External public debt: 54 percent of GDP at end-2005; creditor composition: 79 percent multilateral, 18 percent bilateral, <1 percent commercial. - Central government net domestic debt including arrears: 33 percent of GDP at end-2005. - Baseline DSA results: - NPV of debt projected to increase minimally from 32 to 34 percent of GDP. - NPV of debt-to-exports projected to decrease from 91 to 83 percent. - Debt service payments increase from 7 to 11 percent of exports. - Alternative and stress scenarios: - One-time 30 percent exchange rate depreciation relative to baseline would bring NPV of debt-to-GDP close to the 50 percent threshold. - Worsening borrowing terms could increase NPV of debt-to-exports to 126 percent. - Alternative scenario allowing up to US$20 million per year on commercial terms over 2006–09 used to assess shortfall of highly concessional loans. - Fiscal DSA baseline: - NPV of debt-to-GDP ratio decreases to 50 percent in 2026 from 60 percent in 2006 under baseline. - Debt service rises to 20 percent of revenues by 2026 in baseline; alternative scenario raises it to 22 percent. - Long-run contingent liability risk: - World Bank simulations indicate INPS pension system will move into cash flow deficit by 2037; early reforms would lower long-run adjustment burden. - DSA conclusion: - Cape Verde is not likely to face debt distress if sustainability indicators remain below thresholds, contingent on prudent fiscal and debt management and reduction of high debt ratios. ### Program risks and sensitivities - Key risks: - Higher than expected inflation if wage growth in 2006–07 exceeds underlying inflation and productivity growth (note: a 3.5 percent increase in civil service wages was recently announced). - Continued increases in government wage bill: failure to scale back to 2005 level would halve 2007 fiscal space; continuation of five-year wage bill growth would eliminate projected fiscal space and leave residual financing gap of 1 percent of GDP by 2009. - Quasi-fiscal risks and service disruptions in public service enterprises (Electra, TACV). - Outflows of emigrant deposits (around 40 percent of M2): gross reserves would fall below 2 months of imports if only 20 percent withdrawn; completely depleted with withdrawal of less than 60 percent. - Fluctuations in external concessional support as country graduates to middle-income status. ### Monitoring, assessment criteria, and data/reporting - Monitoring framework: - Two reviews per annum initially; quantitative criteria monitored quarterly; first review based on end-September 2006 criteria (first review mission scheduled for November 2006). - Selected quantitative targets / ceilings (sample values from TMU tables): - Floor on net international reserves of the BCV: 137.0 - Ceiling on accumulation of new domestic payment arrears by central government: initial 5.3; indicative targets 0.0 across quarters. - Ceiling on contracting or guaranteeing of nonconcessional external debt by central government: sequence includes 10.0; 10.0; 20.0; 5.0; 10.0; 15.0; 20.0. - Reporting and definitions: - Net Domestic Borrowing (excluding clearance of arrears and net late payments) defined and adjusted by deviations in external debt service and nonproject external assistance; quarterly reporting within five weeks after quarter end. - Net International Reserves (NIR) defined; weekly NIR table with maximum two-week delay. - NDA of BCV defined; monthly BCV and consolidated commercial bank balance sheets within five weeks. - Government to submit documentation of measures to meet criteria within one week. - Statistical and TA needs: - Statistical master plan funded in part by development partners; estimated US$15 million required through 2010. - New CPI index scheduled for release in 2006. - Authorities seek continued TA for statistics, debt management, fiscal summary information from online budget system, and financial sector regulation. ### Social indicators and Millennium Development Goals (selected) - Poverty and social indicators: - Percentage of poor, 2001–02: 30.0 - Incidence of absolute poverty (series): 49.0 2/ ......37.0...25.0 (table format preserved) - Net primary enrollment ratio (percent): 99.2 - Under 5 mortality rate (per 1,000): series include 60.0 → 20.0 - Access to improved water source (percent of population): series include 74.0...80.0 - MDG observation: - Cape Verde on target to reach most MDGs before 2015, including halving poverty; reaching MDGs will place pressures on public spending for infrastructure and service quality. ### Staff appraisal and Board recommendation - Staff assessment: - Authorities committed to macroeconomic stability and structural reforms; policies strengthen foundations for sustained growth and poverty reduction. - Weaknesses remain in statistical coverage, fiscal reporting, and capacity which require continued TA and adequate budgetary resources. - Recommendation: - Staff recommends Executive Board approval of the request for a three-year PSI given commitment to sound economic management and program anchors (reserve build-up and debt reduction). *Source: IMF staff report content unit _cr06334 (selected excerpts).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Recent economic performance and macroeconomic stability - Cape Verde’s economic and policy performance has strengthened significantly in recent years, supported by reforms under the PRGF. - Growth has averaged around 5 percent since 2000, with growth estimated at nearly 6 percent in 2005. - The 2005 MCA grant is for US$110 million (around 11 percent of GDP), to be spread over 4–5 years. - CPI developments: - The CPI rose by 7.4 percent in the year to May 2006, mainly reflecting higher food prices and increases in regulated petroleum prices. - Excluding these factors, the CPI increased by only 0.6 percent. - The real effective exchange rate depreciated by 0.1 percent in the year to April 2006. - International reserves rose from 2.4 months of prospective imports in 2004 to 3.0 months in December 2005. ### Fiscal developments and public debt - Fiscal stance: - Fiscal restraint was maintained through the recent election cycle. - The fiscal deficit reached 5.1 percent of GDP in 2005, mainly reflecting an increase in the provision of concessional external loans and a delay in the disbursement of budget grants. - Sales of government financial and nonfinancial assets enabled net domestic borrowing, excluding for arrears clearance, to decline to -0.2 percent of GDP. - Public debt: - Domestic debt (including arrears, but net of deposits) fell slightly and was around 33 percent of GDP at end-2005. - Spending pressures: - Government wage bill increases (promotions and hiring of security personnel and teachers toward the end of 2005) are creating fiscal pressures. ### External sector and reserves - Current account and trade: - The external current account deficit fell from over 14 percent of GDP in 2004 to 4.6 percent in 2005. - Exports of goods and services grew by 20 percent from 2004 to 2005, while imports grew by only 0.5 percent in nominal terms. - Reserves and external financing: - International reserves increased to 3.0 months of prospective imports by December 2005, strengthening the credibility of the exchange rate peg to the euro. - Cape Verde has attracted sizable inflows of external finance from private and official sources, supporting investment and development. ### Monetary and financial sector developments - Liquidity, interest rates, and reserves: - Excess reserves of commercial banks have increased significantly because of strong net foreign exchange inflows, a lower reserve requirement, and a slowdown in private sector credit growth in early 2005. - The primary reserve requirement was reduced from 19 percent to 18 percent of deposits in November 2004, to 17 percent in June 2005, and to 15 percent on March 1, 2006. - Treasury bill rates declined from 5.0 percent in April 2005 to 2.0 percent in April 2006. - Actual lending rates have also markedly declined; deposit rates have only marginally decreased. - The Bank of Cape Verde (BCV) has started to sell central bank securities to partially absorb excess liquidity. - Banking sector structure and indicators: - Total banking sector assets have grown by 20 percent since end-2004 to reach over 90 percent of nominal GDP. - Growth is heavily concentrated in lending to the real estate and construction sectors. - Emigrant deposits account for over 40 percent of total deposits. - Profitability of domestic commercial banks suffered significantly in 2005 due to tightened interest spreads and excess liquidity, though prudential indicators remain sound. - Financial services development: - Rapid growth in the offshore financial sector (five operating banks). - Modernization of the payment system and revitalization of the Cape Verde stock exchange. ### Structural reforms and public sector management - Privatization and enterprise reform: - New management team selected to restructure the national airline TACV in preparation for privatization. - Bidding is under way for privatizing the port operator ENAPOR. - Remaining four companies on the privatization agenda are expected to be either liquidated or sold later in 2006. - Public financial management and civil service reforms: - Following the 2003 CFAA, authorities completed a detailed action plan to build capacity in public finance management. - A civil servants database has been established; reforms of number, allocation, and remuneration of civil servants are being prepared. - Trade policy and WTO accession: - Authorities are pursuing measures related to WTO accession, including a proposal to further reduce external tariffs; accession is expected to be voted on by WTO members in July 2006. ### Policy priorities for a Policy Support Instrument (PSI) - Rationale for a PSI: - Cape Verde is well-suited to a PSI: macroeconomic stability has largely been achieved, IMF financial resources are not needed, and the authorities want to maintain close policy dialogue with the Fund. - Core policy emphases under the PSI would include: - Supporting the exchange rate peg by increasing foreign reserve coverage and strengthening the operation of monetary policy. - Creating fiscal space to manage potential pressures or reduced access to concessional external financing by reducing government debt as a share of GDP, better prioritizing expenditures, and rationalizing tax exemptions. - Strengthening public sector management through improved capacities and procedures for budget management, and civil service reforms. - Addressing risks arising in public service enterprises by improving the regulatory framework for the energy sector and restructuring the national airline. - Improving the business environment by reducing administrative barriers, increasing labor market flexibility, and strengthening vocational training. - Ensuring financial sector development—domestic banks and the offshore sector—occurs within an institutional framework aligned with international best practices. *Source: Executive Summary (IMF Article IV / PSI preparatory materials).* ### 10. Steps have been taken to clear the backlog of government accounts. Draft ### _cr06334 - 10. Steps have been taken to clear the backlog of government accounts. Draft ### Clearing government accounts and audit capacity - Draft accounts for 1998–2003 have been submitted to parliament for transmittal to the Court of Auditors (TdC), and provisional quarterly accounts for 2004 and 2005 have been submitted to parliament. - Remaining concerns: - Capacity constraints in the TdC and the Inspectorate General of Finance. - Large statistical discrepancies in the provisional quarterly accounts. - Government response: - Actions to address these concerns are part of the government’s new program. ### Action plan to settle public cross-debt - A recent study found total net central government debt to the municipalities, the social security fund (INPS), and public and parapublic enterprises of CVEsc 5.9 billion. - The government has agreed to settle CVEsc 4.8 billion (equivalent to 5.5 percent of GDP); the rest is disputed. ### Progress and measures on electricity and water tariffs; Electra update - After the government decided to eliminate fuel subsidies starting June 1, 2006: - Water tariffs were increased by 13.3 percent at the end of May. - Electricity tariffs were increased by 25.4 percent at the end of May. - The autonomous economic regulatory authority (ARE) has signaled commitment to fully implement an automatic mechanism for adjusting tariffs to reflect input cost changes and provide incentives for efficiency improvements. Box 1 — Update on Electra (key points and amounts) - June 2005 agreement on tariff deficit: settlement of US$10 million to be paid to Electra in five equal annual installments starting in 2006. - Additional outstanding government liabilities to Electra of about US$5 million comprise: - US$2.5 million for unpaid electricity and water bills of central government, parastatals, and other public entities. - US$2.5 million for VAT refunds and revenue losses following the introduction of the VAT (Electra was required to pay VAT without any adjustment to the tariff structure). - Recapitalization: - Government recently paid its share amounting to US$3 million. - Municipalities’ share in recapitalization amounts to US$1 million (not included in arrears below). - Municipal arrears to Electra (excluding recapitalization share): believed to be around US$3 million. - Government actions: - Urging municipalities to clear arrears. - Taking steps to ensure municipalities remain current in electricity and water payments. ### Accomplishments under the PRGF arrangement - Context and outcomes: - Cape Verde faced severe macroeconomic imbalances after the 2001 elections; since then economic and policy performance has been strong. - Overall results under the program were considerably better than anticipated. - Solid growth, supported by strong official and private capital inflows, has significantly alleviated poverty since the early 1990s. - Cape Verde is about to graduate to middle-income status and is on target to reach most of the Millennium Development Goals (MDGs) before 2015—including the target of cutting poverty in half. - Reaching MDGs in health, education, and sanitation will place major pressures on public spending to strengthen infrastructure and the volume and quality of services. - Fiscal and structural progress: - Strengthening of the fiscal position since 2001 has supported a substantial buildup in international reserves. - From forty state-owned enterprises a decade ago, only six enterprises remain on the government’s privatization agenda, which should be completed in 2006–07. ### IMF–World Bank conditionality coordination (summary) - Under the PRGF arrangement (IMF conditionality focus): - Deepening fiscal consolidation; strengthening monetary policy; improving the efficiency of tax and tariff structures; building external debt-management capacities; improving fiscal structure and regulation of public services (including pricing mechanism for oil products and water and electricity tariffs). - Compliance: only two waivers were requested and granted throughout the arrangement. - Under the PSI (IMF conditionality focus): - First-year measures cover: reduce fiscal risks; strengthen policy formulation and control; streamline tax incentives; improve budget prioritization; strengthen financial sector regulation. - World Bank conditionality (PRSCs, about US$10 million for 2006): - Reforms of public expenditure management, the civil service, and the judiciary; decentralization; human resource development; improvements in social protection effectiveness and sustainability. ### Policy discussions: setting the stage for the PSI — main challenges - Key challenges identified for the years ahead: - Accelerating growth and reducing poverty, while consolidating macroeconomic stability. - Safeguarding the exchange rate regime. - Managing fiscal pressures and risks (e.g., creating fiscal space and reducing central government debt). - Strengthening public sector management, notably improving capacities for financial management and pushing ahead with comprehensive civil service reform. - Government strategy set out in the PRSP and PRSP Progress Report. ### Accelerating growth and reducing poverty — priorities - Government’s economic strategy for 2006–11 aims at substantially increasing GDP growth over the medium to long term to reduce unemployment and poverty. - Agreed priorities to ensure tourism-led benefits spread into broad-based growth: - Improve development and deployment of labor resources: - Enhance vocational training, including tourism-targeted training. - Plan to amend the labor code to enhance flexibility and job creation, while safeguarding working conditions. - Strengthen the business climate: - Support development of small and medium-enterprises and ancillary services to tourism. - Reduce administrative costs of doing business; “one-stop” facilities to complete online all procedures for registering and opening a business within 24 hours. - Regulatory reforms to liberalize the telecom market and develop transportation services. - Support financial sector development: - Identify and remove obstacles to private sector credit growth and reduce the cost of capital. - Amend regulatory and legislative framework to protect lenders; strengthen banks’ capacity for project-based lending; support SME access to credit. - Develop the offshore financial sector while addressing risks through regulatory reforms aligned with international best practice. - Ensure adequate and reliable supplies of energy and water: - Improve regulatory framework in the energy sector, including full and transparent implementation of the automatic tariff-adjustment mechanism. - Promote conservation and alternative energy sources to reduce dependence on oil imports. ### Safeguarding the exchange rate regime - Fixed exchange rate outlook: - Fixed exchange rate has served as anchor for stability; no indications of misalignment. - Real effective exchange rate has depreciated by more than 6 percent over the last three years. - Export growth in goods and tourism services is strong; foreign direct investment is booming. - Policy implications: - Maintain macroeconomic stability and low inflation to preserve competitiveness. - Keep wage growth in line with productivity growth and underlying inflation. - Support competitiveness via increased labor flexibility, productivity, trade liberalization, and higher-priced niche tourism products. - Reserve objective: - The new government program envisages an increase in reserve coverage by 2011 to about 4 months of current-year imports of goods and services. Box 3 — Assessing the adequacy of international reserves (key indicators and country-specific factors) - Main indicators to consider: - Import coverage: Coverage of three or four months of prospective imports historically judged sufficient; should be larger if official and private capital flows are large or volatile. - Short-term debt coverage: Reserves should cover at least the country’s one-year foreign liabilities (remaining maturity basis, both domestic and foreign currency-denominated). - Base money coverage: Reserves at least as high as the monetary base would in principle allow conversion into a currency board at any time. - Country-specific factors supporting reserve buildup: - Official aid inflows are about 10–13 percent of GDP. - Remittances and other private transfers about 20 percent of GDP. - Increases in emigrant deposits about 3–5 percent of GDP. - Large stock of emigrant deposits—around 30 percent of GDP and 40 percent of broad money—with unknown interest rate sensitivity. - History of high volatility and periods of precariously low reserve coverage. - Currently high excess reserves in the banking system. - Country-specific factors mitigating the need for further reserves: - Portuguese exchange rate support credit line of 27.5 million euros, with extension up to 45 million euros if Cape Verde provides collateral. - Existence of capital account restrictions. - Likely high correlation between foreign exchange inflows and outflows (aid-funded imports for infrastructure, imports for tourists, goods for processing, imports for procurement in ports). - Main international reserve indicators for Cape Verde (as presented) - Gross reserve coverage in months of prospective imports: 2000: 0.9; 2004: 2.4; 2005: 3.0 - Less excess reserves: 2000: 0.9; 2004: 2.3; 2005: 2.7 - including the Portuguese credit line: 2000: 2.3; 2004: 3.4; 2005: 3.9 - Gross international reserves to currency in circulation: 2000: 0.5; 2004: 1.7; 2005: 2.1 - Gross international reserves to reserve money: 2000: 0.2; 2004: 0.6; 2005: 0.8 - including the Portuguese credit line: 2000: 0.6; 2004: 0.9; 2005: 1.0 - Gross international reserves to domestic broad money: 2000: 0.1; 2004: 0.3; 2005: 0.4 - Gross international reserves to emigrant and foreign currency deposits: 2000: 0.2; 2004: 0.4; 2005: 0.5 - Gross international reserves in millions of euros: 2000: 30.4; 2004: 102.4; 2005: 147.5 ### Managing fiscal pressures and risks - Potential sources of fiscal pressure: - Government liabilities to the public pension system as it develops and matures. - Growth in demand for health, education, training, and other public services. - Less access to highly concessional external support as Cape Verde moves into middle-income status. - Prospective need for increased domestic capital participation in public investment projects as concessional financing declines. - Policy orientation: - Medium-term fiscal policy should create fiscal space to prepare for contingencies. - Creating fiscal space would be generated in part by reducing government debt as a share of GDP, lowering interest expenditures and providing an additional buffer against shocks. ### Strengthening public sector management - Ongoing structural reforms to strengthen fiscal position: - Strengthen capacities and procedures for formulating, executing, monitoring, and auditing the budget. - Implement the Country Financial Accountability Assessment (CFAA) action plan and the medium-term expenditure framework (MTEF). - Reforms to improve civil service capacities and productivity within the constraints of the wage bill. - Rationalize departmental staffing levels and reform wage structures to ensure government compensation is competitive without pressuring private sector wages. ### Medium-term policy framework and PSI design - Authorities and staff reached understanding ad referendum on a three-year policy framework to be supported by the PSI. - Economic and policy considerations underlying the program include: - Projections for economic growth and inflation for 2006–09. - The rate of increase in foreign exchange coverage. - The relative role of fiscal and monetary policy in supporting reserve buildup. - Formulation of the fiscal anchor and medium-term fiscal strategy. - Design of the monetary policy operational framework. - Structural measures to support fiscal objectives, reduce economic and financial risks, and enhance growth. *Source: IMF staff report content unit _cr06334 - 10. Steps have been taken to clear the backlog of government accounts. Draft* ### 26. The government’s ### _cr06334 - 26. The government’s ### Macroeconomic framework and growth projections - Growth is projected to be around 5.5 percent in 2006, mainly because of short-term influences including the negative impact on private sector purchasing power of recent increases in food and regulated prices, and delays in undertaking the 2006 public investment program. - Growth is expected to increase thereafter, averaging 6–7 percent in 2007–09. - Foreign direct investment (FDI) is expected to remain strong, although cautiously assumed to grow at a more measured pace over the medium term. - Budget grants and loan assumptions are based on identified donor commitments. - Current levels of project assistance (apart from MCA-related activity) and private remittances as a share of GDP are assumed to continue over the medium term before gradually tapering off as residents’ income level rises. - There is upside potential in the growth outlook if FDI continues to increase at the same rate as projected for 2006 to 2007. ### Inflation outlook and external balance - Consumer price inflation is projected to fall to close to zero in 2007–08 and stabilize at 2–3 percent thereafter. - The staff emphasized that a rapid return to low inflation is important for supporting the exchange rate peg and allowing budget limits (particularly the wage bill) to be respected. - The 12-month inflation rate would fall sharply once recent increases in regulated prices fall out of the base and food prices return to more normal levels. - Medium- to long-term inflation would then remain in line with inflation in the euro area. - After declining in 2005, the current account deficit is projected to rise—largely reflecting higher imports of capital goods driven by MCA projects and private investment. ### Key projections (Cape Verde: Key Projections, 2006–09) - Real GDP (percent change): 2005 5.8; 2006 5.5; 2007 6.0; 2008 6.3; 2009 6.6 - Inflation (annual, percent): 2005 0.4; 2006 6.2; 2007 0.2; 2008 0.3; 2009 2.1 - Central gov't revenues (percent of GDP): 2005 24.1; 2006 25.1; 2007 24.7; 2008 25.2; 2009 25.8 - Central gov't grants (percent of GDP): 2005 7.1; 2006 9.0; 2007 8.9; 2008 9.2; 2009 9.3 - Central gov't expenditures (percent of GDP): 2005 36.3; 2006 41.2; 2007 37.9; 2008 38.4; 2009 38.0 - Central gov't overall balance (percent of GDP): 2005 -5.1; 2006 -7.1; 2007 -4.3; 2008 -4.0; 2009 -2.9 - Central gov't domestic borrowing (1) (percent of GDP): 2005 -0.2; 2006 -1.9; 2007 -0.2; 2008 -0.3; 2009 -0.5 - Central gov't external borrowing (1) (percent of GDP): 2005 3.2; 2006 3.5; 2007 3.4; 2008 3.3; 2009 2.4 - Current account balance (percent of GDP): 2005 -4.6; 2006 -6.9; 2007 -10.0; 2008 -11.0; 2009 -11.5 - FDI (percent of GDP) (2): 2005 2.0; 2006 2.1; 2007 3.4; 2008 4.0; 2009 4.4 - Investment ratio (percent): 2005 37.9; 2006 38.7; 2007 41.2; 2008 43.8; 2009 45.0 - Saving ratio (percent): 2005 33.3; 2006 31.8; 2007 31.3; 2008 32.8; 2009 33.5 - Broad money growth (percent, eop): 2005 15.5; 2006 13.6; 2007 7.4; 2008 7.7; 2009 9.5 - Sources: Cape Verdean authorities, and staff estimates. (1) Excluding for arrears clearance. (2) Projections. ### Reserves and reserve accumulation target - The medium-term program aims to increase reserve coverage further by 0.1 months of prospective imports per year (equivalent to about ½ percent of GDP). - Authorities and staff view this target as balancing reserve strengthening against monetary and fiscal constraints while keeping lending rates low to support credit expansion and private sector growth. - Fiscal restraint is necessary to reach the reserve target because there is limited scope for monetary policy to effect a long-term, sustainable buildup in reserves. - Containing domestically financed government expenditures is the prime policy tool for achieving the reserve target, since the overall fiscal deficit largely reflects the provision of external aid and its grant-loan distribution. ### Fiscal policy, debt targets, and fiscal space - The program aims to lower the central government debt ratio to below 70 percent of GDP by 2009. - The program includes reducing government domestic debt to close to 20 percent of GDP by 2009, down from around 33 percent at end-2005. - Net domestic borrowing would be the operational target and assessment criterion under the PSI; borrowing would be measured exclusive of arrears clearance. - The program would create fiscal space growing to around 1.7 percent of GDP by 2009 for additional priority spending, tax cuts, or further debt reduction. - Sources of fiscal space include: - mobilizing domestic revenue through tax system and tax administration improvements and streamlining tax incentives and exemptions; - improving expenditure prioritization in line with the PRSP; - moderately scaling back the wage bill as a share of GDP to its 2005 level; - ending petroleum subsidies as announced in the 2006 budget; - lowering interest costs as debt declines. - The program allows for limited government or government-guaranteed external borrowing that does not meet the full 35 percent concessionality threshold, capped at US$20 million, for essential projects if fully concessional financing is not available. ### Monetary policy and liquidity management - Medium-term monetary policy will be geared to safeguarding the exchange rate peg with the euro as an anchor for low inflation. - The monetary policy framework has at times functioned similarly to a currency board: changes in foreign reserves at the central bank have been the main source of variations in the money supply. - Fiscal dominance is absent; the government is required by law to settle any outstanding balance on its overdraft account in the BCV at the end of each year. - Periodic upsurges in excess liquidity and the recent decline in Treasury bill rates highlighted uncertainties in the BCV’s operating framework. - Following IMF technical assistance, authorities intend to formulate a set of intermediate monetary indicators—including broad money, credit growth, excess liquidity, and the interest differential with the euro area—to guide liquidity management. - In-house capacity will be built for tracking large external capital flows to gauge the interest sensitivity of emigrant deposits and other private flows. ### Structural reform program (priorities and measures) - Reform priorities include improving economic governance, fiscal management, and capacity to formulate policy; sheltering the budget from quasi-fiscal losses; and strengthening the financial sector. - MEFP-detailed reform agenda highlights: - Clearance of the stock of outstanding central government arrears of CVEsc 5.3 billion by end 2009 and measures to prevent reaccumulation. - Further efforts to reinforce revenue collection, including legislation to reform the complex system of tax exemptions by mid-2007 so exemptions are granted according to clearly defined economic criteria and regulated under a single law. - Measures to strengthen public sector management capacity, including implementation of the CFAA action plan and the MTEF and reforms to civil service staffing and compensation. - Regulatory and institutional reforms to support production and distribution of electricity and water, including full application of the automatic tariff adjustment mechanism. - Reforms to ensure regulation and supervision of financial institutions, including in the offshore center, align with international best practice. ### Program for 2006–07 (fiscal measures and monitoring) - Short-term fiscal strategy highlights: - Fiscal position will be strengthened, supported by privatization and land sale receipts (3.7 percent of GDP). - To continue reducing domestic debt, government net domestic borrowing—except for clearance of arrears and late payments—will be limited to -1.9 percent of GDP in 2006 and -0.2 percent in 2007. As a result, domestic debt, net of deposits but including arrears, is projected to decline to 25 percent of GDP at end-2007. - Arrears clearance of 1.7 percent of GDP is budgeted for 2006 (one-third of the end-2005 stock of arrears) and significant further arrears clearance is anticipated in 2007. - Petroleum subsidies were eliminated starting June 1, 2006, and full provision has been made in the 2006 budget for oil subsidies accrued in 2005 and the first part of 2006. - The program will be monitored using assessment criteria and structural benchmarks set out in the MEFP and Technical Memorandum of Understanding. - Program implementation and results will be subject to two reviews per annum with initial assessment criteria and benchmarks for end-September 2006 and end-December 2006, and indicative targets for 2007. The first review mission is scheduled for November 2006. ### Risks to the program - Cape Verde is susceptible to external and domestic shocks due to being a small open economy with a narrow export base. - Specific risks related to program assumptions include: - Higher than expected inflation, for example if wage growth in 2006–07 exceeds underlying inflation and productivity growth. (Noted: a 3.5 percent increase in civil service wages was recently announced.) - Continued increases in the government wage bill: failure to scale back the wage bill to its 2005 level would cut the 2007 fiscal space in half; continuation of the wage bill growth experienced over the last five years would eliminate the projected fiscal space entirely and leave a residual financing gap of 1 percent of GDP by 2009. - Quasi fiscal risks and service disruptions among public service enterprises (e.g., failure to reach agreement on Electra’s investment plan or TACV not operating on fully commercial terms). - Outflows of emigrant deposits: emigrant deposits comprise around 40 percent of M2. Gross international reserves would be reduced to less than 2 months of imports if only 20 percent of the emigrant deposits were withdrawn, and completely depleted with a withdrawal of less than 60 percent. - Fluctuations in external concessional support: temporary shortfalls in external grants or highly concessional loans, or a faster-than-expected decline in such support as the country moves to middle-income status, would impair the ability to reduce domestic debt as projected if resulting financing gaps were met using domestic resources. ### Statistical issues and technical assistance needs - Quality and timeliness of Cape Verde’s economic and financial data are generally adequate for surveillance and program monitoring, although some areas need substantial improvement (see Appendix III). - Staff concerns include monitoring of some fiscal performance and debt aspects (especially external debt), weaknesses in national accounts and CPI, and tracking of large external flows. - Authorities are working to strengthen statistics. A comprehensive master plan directed by the National Statistical Institute (INE) outlines steps to improve all areas of statistics. - Development partners have committed a substantial part of the estimated US$15 million required to implement the plan through 2010. - A new CPI index is scheduled to be released in 2006. - Authorities seek continued technical assistance for strengthening the statistical system, improving debt management, producing summary fiscal information from the online budget monitoring system, and strengthening financial sector regulation. ### Staff appraisal and overall assessment - Authorities are firmly committed to macroeconomic stability and structural reforms; policies are strengthening foundations for sustained growth and poverty reduction. - Cape Verde’s strong performance under its first PRGF-supported program significantly alleviated poverty and led to “graduation” to middle-income status effective in 2008. - Growth reached close to 6 percent in 2005, and the fiscal stance was prudent through the recent election cycle, contributing to reserve accumulation, a decline in domestic debt, and enhanced policy credibility. - Despite higher international oil prices’ impact, the medium-term outlook is favorable; growth is expected to increase after slowing in 2006. - Vigilance is required to ensure one-off price adjustments do not spread into generalized inflation. - The fixed exchange rate peg to the euro should continue to play the central role in the macroeconomic policy framework; there is no current need to harden the peg further. - The medium-term program provides a sound basis for macroeconomic stability, economic development, and poverty reduction, with attention to reducing fiscal risks and creating a margin of safety against shocks. - The staff fully agrees with program anchors to increase international reserves and reduce the government debt-to-GDP ratio; containing domestic borrowing should help achieve both objectives and create space to meet potential future budget pressures, including from the public pension system and possible declines in highly concessional external support. *Source: IMF staff report (content unit _cr06334 - 26. The government’s).* ### 46. The targeted rate of reserve build-up and debt reduction appropriately balances ### _cr06334 - 46. The targeted rate of reserve build-up and debt reduction appropriately balances ### Macroeconomic balance: reserve build-up and debt reduction - The targeted rate of reserve build-up and debt reduction "appropriately balances monetary and fiscal considerations." - The macroeconomic framework "provides adequate room for lower interest rates, increased credit to the private sector, and further growth of government capital spending and high-priority current spending." ### 2006–07 fiscal program and medium-term strategy - The government’s program for 2006–07 "is in line with the medium-term strategy and frontloads key measures." - Fiscal position will be substantially strengthened through: - "a sizable reduction in the domestic debt ratio;" - "clearance of arrears and steps to prevent their recurrence;" - "full provision in the budget for past oil subsidies together with elimination of future petroleum subsidies, which will remove a key source of fiscal risk." - Caveat: "debt reduction in 2006 is largely due to one-off privatization and land sale receipts, which cannot be relied on as financing sources in the future." ### Restructuring and privatization - "The restructuring and privatization of the national airline TACV and the port operator ENAPOR should help reduce fiscal risks, improve economic efficiency, and enhance growth prospects." ### Utilities, tariffs, and investment incentives - "Despite recent progress, ensuring adequate and reliable supplies of electricity and water remains a significant concern." - Key policy to overcome difficulties: "strengthen the regulatory framework so that tariff levels provide adequate incentives for investment." - Specific recommendation: "full and transparent application of the automatic tariff adjustment mechanism for electricity and water would help provide a more stable environment for much needed investment to improve the volume and efficiency of energy supply, and prevent the re-emergence of a tariff deficit." ### Offshore financial center monitoring and regulation - "The rapidly developing offshore financial center needs to be carefully monitored." - Potential benefits: "gains in employment, expertise, and financial services to the economy." - Risks and response: "there are also inherent risks. Regulatory reforms are necessary to ensure that financial development takes place within a sound institutional framework that is in line with international best practice." ### Data, statistics, and implementation capacity - "Cape Verde’s economic and financial data are generally adequate for surveillance and program monitoring, but weaknesses remain." - The staff "urges the authorities to provide adequate budgetary resources to ensure full implementation of the statistical master plan." ### Staff recommendation - Given the authorities’ commitment to sound economic management, "the staff recommends Executive Board approval of the request for a three-year PSI." *Source: _cr06334 - 46. The targeted rate of reserve build-up and debt reduction appropriately balances* ### 53. It is recommended that the next Article IV consultation with Cape Verde take ### _cr06334 - 53. It is recommended that the next Article IV consultation with Cape Verde take ### Recommendation - It is recommended that the next Article IV consultation with Cape Verde take place within 24 months subject to the provisions of the decision on consultation cycles in program countries. ### National accounts and prices (selected annual percentage change and levels) - Real GDP: 5.3, 4.7, 4.4, 5.8, 5.5, 6.0, 6.3, 6.6 - Real GDP per capita: 3.4, 2.8, 2.5, 3.8, 3.5, 4.1, 4.3, 4.6 - Consumer price index (annual average): 1.9, 1.2, -1.9, 0.4, 6.2, 0.2, 0.3, 2.1 - Consumer price index (end of period): 3.0, -2.3, -0.3, 1.7, 5.5, -1.1, 1.3, 2.5 ### External sector (selected indicators) - Exports of goods and services: 14.1, 6.1, 5.2, 20.5, 8.9, 4.8, 6.1, 6.2 - Imports of goods and services: 15.3, 7.5, 6.5, 0.5, 14.6, 9.2, 8.9, 8.9 - Real effective exchange rate (annual average): 0.5, 1.8, -2.9, -2.1, ............ - Terms of trade (minus = deterioration): -0.7, 1.9, -2.8, -3.3, -0.5, 1.4, 1.3, 0.9 ### Savings-investment and current account - Gross capital formation: 35.8, 31.0, 36.8, 37.9, 38.7, 41.2, 43.8, 45.0 - Gross national savings: 24.4, 20.0, 22.4, 33.3, 31.8, 31.3, 32.8, 33.5 - External current account (including official current transfers): -11.4, -11.1, -14.4, -4.6, -6.9, -10.0, -11.0, -11.5 - External current account (excluding official current transfers): -17.2, -17.1, -20.1, -9.3, -14.4, -16.4, -17.3, -17.7 - External current account (million euros, including official transfers): -75.5, -79.7, -107.0, -36.1, -61.0, -95.2, -113.0, -129.3 ### Government budget and public debt (selected percent of GDP and levels) - Total revenue (excluding grants) series (percent of GDP): 12.3, 5.1, 8.7, 10.2, 17.3, 5.8, 9.7, 12.2 - Total expenditure (percent of GDP): 13.4, -1.4, 26.5, 1.2, 27.8, -1.2, 9.1, 8.3 - Overall balance before grants (percent of GDP): -11.5, -9.1, -14.9, -12.2, -16.1, -13.2, -13.2, -12.2 - Overall balance (including grants) (percent of GDP): -2.9, -3.5, -4.0, -5.1, -7.1, -4.3, -4.0, -2.9 - Total nominal government debt (net of central government deposits; including verified stock of domestic and external arrears) series: 85.7, 84.8, 89.0, 88.1, 79.6, 77.1, 74.3, 69.8 - External government debt (measured in domestic currency): 56.4, 57.5, 54.0, 55.4, 52.4, 52.0, 51.4, 49.3 - Domestic government debt, net of deposits (excluding claims on the offshore Trust Fund): 29.2, 27.3, 35.0, 32.7, 27.2, 25.1, 23.0, 20.5 ### Annual fiscal operations (central government; percent of GDP and billons of Cape Verde escudos) - Table highlights (percent of GDP, 2005–09 projections): - Revenue, grants, and net lending: 27.1, 83, 33.4, 37.3, 12, 35.4, 22, 38.9, 77, 43.6, 14 (as presented in source table structure) - Domestic revenue: 20.9, 76, 24.6, 04, 24.6, 04, 26.0, 37, 28.5, 63, 32.0, 42 - Tax revenue: 18.6, 01, 21.0, 99, 21.0, 99, 23.0, 50, 25.2, 28, 28.3, 10 - External grants: 6.2, 08, 8.8, 33, 7.0, 09, 9.3, 86, 10.4, 13, 11.5, 72 - Capital expenditure: 11.6, 24, 16.2, 90, 16.2, 90, 16.7, 05, 18.1, 47, 20.0, 73 - Overall balance, including grants (budget basis): -4.4, -32, -6.9, 76, -8.8, 01, -4.4, 91, -4.5, 82, -3.5, 77 - Table 3 (2006 levels, percent of GDP): - Revenue, grants, and net lending: 31.2, 34.1, 32.2, 33.6, 34.3, 35.1 - Total expenditure: 36.3, 41.2, 41.2, 37.9, 38.4, 38.0 - Overall balance, including grants (budget basis): -5.1, -7.1, -9.0, -4.3, -4.0, -2.9 - Financing (cash) and components: Foreign (net) 3.2, 3.5, 3.5, 3.4, 3.3, 2.4; Domestic financing (net) 1.7, 3.6, 5.5, 0.9, 0.7, 0.5 (Note: Tables present detailed line items including tax breakdowns, wages and salaries, capital grants, MCI, and arrears clearance as percent of GDP and in billons of Cape Verde escudos for 2005–09; values are preserved in the source tables.) ### Monetary sector and monetary survey (selected levels and percent changes) - Broad money (M2) (levels): 63,907; 72,644; 82,511; 88,631; 95,479; 104,515 - Broad money (M2) (percent change): 15.5, 13.6, 7.4, 7.7, 9.5 - Net foreign assets (levels): 14,904; 21,889; 26,056; 28,555; 31,307; 34,257 - Net domestic assets (levels): 49,003; 50,755; 56,456; 60,076; 64,172; 70,258 - Credit to the economy (percentage change): 9.5, 9.2, 13.7, 13.9, 13.8, 12.9 - Emigrant deposits (levels memo): 25,713; 28,318; 31,339; 33,663; 36,264; 39,697 - Gross international reserves (millions of euros, end of period): 76.1, 74.1, 102.4, 147.4, 166.4, 187.1, 210.1, 233.0 (as presented across tables) - Gross international reserves (months of prospective imports of goods and services): 1.9, 1.7, 2.4, 3.0, 3.1, 3.2, 3.3, 3.4 (series in source) ### Balance of payments (millions of Cape Verde escudos, 2005–09 projections) - Current account balance (including official transfers): -3,980; -6,725; -10,499; -12,463; -14,260 (2005–09 series) - Trade balance: -30,960; -37,178; -42,114; -46,683; -51,328 - Exports, f.o.b.: 7,891; 8,862; 8,566; 8,833; 9,180 - Imports, f.o.b.: -38,851; -46,040; -50,681; -55,516; -60,508 - Services (net): 5,149; 5,782; 6,322; 6,707; 6,798 - Services credit: 23,668; 25,513; 27,468; 29,399; 31,428 - Of which: tourism: 9,566; 10,327; 11,128; 11,922; 12,757 - Services debit: -18,519; -19,731; -21,146; -22,692; -24,630 - Income (net): -2,966; -2,905; -2,829; -2,836; -2,950 - Credit: 1,649; 2,167; 2,371; 2,576; 2,864 - Debit: -4,615; -5,073; -5,201; -5,413; -5,814 - Current transfers (net): 24,797; 27,577; 28,123; 30,349; 33,219 - Capital and financial account (net): 7,173; 8,900; 12,827; 15,137; 16,627 - Capital transfers: 1,821; 1,420; 2,554; 3,259; 3,837 - Of which: MCA: 665; 333; 1,386; 2,001; 2,460 - Direct investment (net): 1,708; 2,110; 3,543; 4,498; 5,421 - Net official flows (government): 2,080; 3,431; 3,541; 3,781; 2,977 - Disbursements: 4,314; 5,531; 5,726; 5,926; 5,615 - Amortization: -2,234; -2,101; -2,185; -2,145; -2,639 - Emigrant deposit flows: 3,227; 3,021; 2,324; 2,601; 3,432 - Gross international reserves: 16,260; 18,356; 20,639; 23,177; 25,702 (memo) - In months of current year's import of goods and services: 3.4; 3.3; 3.4; 3.6; 3.6 - In months of next year's import of goods and services: 3.0; 3.1; 3.2; 3.3; 3.4 - External public debt: 48,303; 51,733; 55,274; 59,056; 62,032 ### Financial soundness indicators (banking sector; end-year percent, 2002–05) - Regulatory capital to risk-weighted assets: 15, 13.8, 13.3, 12.1 - Regulatory tier 1 capital to risk-weighted assets: 16.5, 15.2, 14.6, 13.4 - Nonperforming loans to total loans: 7.4, 7.4, 7.2, 6.3 - Nonperforming loans net of provisions to capital: -7.9, -3.6, 0.4, -2.5 - Provisions to nonperforming loans: 114.9, 106.3, 99.3, 104.9 - Return on assets (ROA): 1.1, 1.1, 0.7, 0.5 - Return on equity (ROE): 18.7, 19.8, 12.3, 9.7 - Interest margin to gross income: 66.7, 68.5, 65.5, 62.7 - Noninterest expenses to gross income: 56.6, 57.4, 57.6, 61.2 - Liquid assets to total assets: ..., 48.8, 48.1, 46.2 - Liquid assets to short-term liabilities: ..., 174.3, 176.9, 170.2 - Emigrant deposits over total deposits: ..., 42, 43.2, 41.5 - Emigrant deposits over total assets: ..., 35.8, 37, 34.8 ### Millennium Development Goal excerpt - Goal 1. Eradicate extreme poverty and hunger. - Target 1: Halve between 1990 and 2015, the proportion of people whose income is less than US$1 a day. *Sources: Cape Verdean authorities, Bank of Cape Verde, Ministry of Finance and Public Administration, IFS, and staff estimates and projections (as presented in the source tables).* ### 1. Population below US$ 1 a day (percent).................. ### _cr06334 - 1. Population below US$ 1 a day (percent).................. ### Millennium Development Goals — Key indicators and outcomes (Cape Verde) - Goal 1: Eradicate extreme poverty and hunger - 3a. Percentage of poor, 2001–02: 30.0 - 3b. Incidence of absolute poverty1: 49.0 2/ ......37.0...25.0 - Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger. - 4. Prevalence of child malnutrition (percent of children under 5): 13.5.........6.8 - Goal 2: Achieve universal primary education - Target 3: Ensure that, by 2015, children will be able to complete a full course of primary schooling - 6. Net primary enrollment ratio (percent of relevant age group): 99.2 - 7. Percentage of cohort reaching grade 5: 92.8 - 8. Youth literacy rate (percent age 15–24): 81.5 85.0 88.6 89.1 89.1... - Goal 3: Promote gender equality and empower women - Target 4: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education by 2015. - 9. Ratio of girls to boys in primary and secondary education (percent): 96.1......99.9 100.0 - 10. Ratio of young literate females to males (percent ages 15–24): 87.5 90.4 93.3 93.8 93.8 100.0 - 11. Share of women employed in the nonagricultural sector (percent): 39.1 - 12. Proportion of seats held by women in the national parliament (percent): 12.0 11.0 11.0 11.0 11.0... - Goal 4: Reduce child mortality - Target 5: Reduce by two-thirds between 1990 and 2015, the under 5 mortality rate - 13. Under 5 mortality rate (per 1,000): 60.0 50.0 38.0 36.0 35.0 20.0 - 14. Infant mortality rate (per 1,000 live births): 45.0 37.0 29.0 30.0 30.0 26.0... - 15. Immunization against measles (percent of children under 12 months): 79.0 66.0 72.0...68.0... - Goal 5: Improve maternal health - Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio. - 16. Maternal mortality ratio (modeled estimate, per 100,000 live births): ...190.0 150.0......... - 17. Proportion of births attended by skilled health personnel: ...54.0 88.5......... - Goal 6: Combat HIV/AIDS, malaria and other diseases - Target 7: Halt by 2015, and begin to reverse, the spread of HIV/AIDS. - 18. HIV prevalence among females (percent ages 15–24): .................. - 19. Contraceptive prevalence rate (percent of women ages 15-49): ......52.9......... - 20. Number of children orphaned by HIV/AIDS: .................. - Target 8: Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases. - 23. Incidence of tuberculosis (per 100,000 people): ......182.0 166.3 167.9... - 24. Tuberculosis cases detected under DOTS (percent): ......42.0......... - Goal 7: Ensure environmental sustainability - Target 9: Integrate the principles of sustainable development into policies and programs. Reverse the loss of environmental resources. - 25. Forest area (percent of total land area): 8.7...21.1......... - 26. Nationally protected areas (percent of total land area): ...0.0 0.0...... - 27. GDP per unit of energy use (PPP $ per kg oil equivalent): .................. - 28. CO2 emissions (metric tons per capita): 0.2 0.3 0.3......... - Target 10: Halve by 2015 the proportion of people without access to safe drinking water. - 30. Access to improved water source (percent of population): ......74.0...80.0... - Target 11: Achieve by 2020 significant improvement for at least 100 million slum dwellers - 31. Access to improved sanitation (percent of population): ......71.0...42.0... - 32. Access to secure tenure (percent of population): .................. - Goal 8: Develop a global partnership for development - Target 16: Develop and implement strategies for productive work for youth. - 45. Unemployment rate of population ages 15–24 (total): .................. - Target 18: Make available new technologies, especially information and communications. - 47. Fixed line and mobile telephones (per 1,000 people): ......21.5 171.0 272.6... - 48. Personal computers (per 1,000 people): ...81.7 68.6...79.7... - Sources: World Bank, and Fund staff estimates. - Notes: - 1 Absolute poverty measures the number of people in 1988 and 2002 whose income is below the 1988 national poverty line, indexed for inflation. - 2 Data for 1988. - Targets 12–15 and indicators 29, 33–44 are excluded because they cannot be measured on a country specific basis. Indicators 21 and 22 are not relevant for Cape Verde. ### Observations from the MDG table - Several indicators show clear time-series progression toward MDG targets (e.g., under 5 mortality: 60.0 → 20.0; net primary enrollment: 99.2). - Data gaps are present for some HIV/AIDS and tenure-related indicators (denoted by ".................."). - Access to improved water source and sanitation show mixed levels: 74.0 and 71.0 in earlier series vs. 80.0 and 42.0 in later entries. --- ### Proposed Work Program 2006–09 (Table 8) - Mission Date / Purpose / Board Date - May 2006 / Discussion of a PSI / End-July 2006 - November 2006 / First review against end-September 2006 assessment criteria / End-January 2007 - February 2007 / Second review against end-December 2006 assessment criteria / End-April 2007 - August 2007 / Third review against end-June 2007 assessment criteria / End-October 2007 - February 2008 / Fourth review against end-December 2007 assessment criteria / End-April 2008 - August 2008 / Fifth review against end-June 2008 assessment criteria / End-October 2008 - February 2009 / Sixth review against end-December 2008 assessment criteria / End-April 2009 ### Letter of Intent — Principal points (July 11, 2006) - Context and objectives - The government completed its first arrangement under the PRGF in July 2005. - The PRGF emphasized strengthening the fiscal position, increasing international reserves, and structural reforms. - Results under the PRGF were "considerably better than expected" with improvements in macroeconomic performance, policy credibility, and external financial support. - PSI rationale - The government requests a three-year Policy Support Instrument (PSI) to maintain policy dialogue with the IMF. - Rationale: macroeconomic stability achieved; IMF financial resources are not needed; PSI would support continued policy performance and signal commitment to sound policies. - Program focus under the PSI - Reduction in government debt. - Further increase in international reserves. - Structural reforms to improve public sector management, reduce fiscal risks, and strengthen the financial sector. - Commitment to keep the IMF regularly updated and provide data for monitoring; consult with IMF on new measures or upon request. ### Memorandum of Economic and Financial Policies (MEFP) — Selected findings, projections, and policy commitments - Recent economic developments (2001–05 and 2005 highlights) - Growth averaged around 5 percent over 2001–05; preliminary indicators point to a pick-up in growth in 2005 to an estimated rate of around 6 percent. - Inflation averaged 0.4 percent in 2005, but increased recently due to higher food and petroleum prices. - International reserves reached 3.0 months of prospective imports in December 2005. - Banking sector: total assets grew by 20 percent since end-2004 to reach over 90 percent of nominal GDP; emigrant deposits account for over 40 percent of total deposits. - Cape Verde received US$110 million from the Millennium Challenge Account (MCA) to be disbursed over five years. - Financial sector developments: expansion of offshore banking; ongoing project to create a centralized credit bureau; Bolsa de Valores de Cabo Verde experiencing a revival. - Medium-term objectives and strategy (2006–09) - Strategy directed at boosting growth and reducing poverty through private sector-led development and diversification. - Policy priorities include: - building human capacities (education, training, health care); - strengthening infrastructure and institutions to support tourism, financial services, and communications; - improving governance and public sector capacity to implement reforms. - PSI program objectives and key policy measures - Enhance sustainability of growth and development through macroeconomic stability and structural reforms. - Specific measures include: - increasing foreign exchange coverage to strengthen the exchange rate peg; - decreasing the burden of domestic debt and clearing remaining domestic arrears; - strengthening public finance management capacity, expenditure control, and revenue performance; - pursuing structural reforms to reduce fiscal risks and improve efficiency; - regulatory reforms to ensure financial sector development occurs within a sound institutional framework. - Growth, inflation, and fiscal outlook under the PSI - Growth is expected to pick up and average 6–7 percent during the PSI program. - Consumer inflation is expected to stabilize at 2–3 percent over the medium term in line with rates in the euro area. - Fiscal strategy aims to preserve macroeconomic stability, reduce risks, and create fiscal space for future pressures (pensions, public services, potential reduction in concessional external finance). - Government intends to reach and then maintain a central government debt ratio of no more than 70 percent of GDP. - Government domestic debt targeted to reach around 20 percent of GDP by 2009 (from over 33 percent at end-2005). - The strategy envisages further reductions in both domestic and external debt as a share of GDP, restraint in current spending and domestic borrowing, and growth of capital spending financed largely by external financing with high import content. *Source: IMF staff report excerpts and Cape Verde MEFP, as provided in the supplied content.* ### 13. This fiscal stance would allow external debt to be lowered from 56 percent of ### _cr06334 - 13. This fiscal stance would allow external debt to be lowered from 56 percent of ### Fiscal stance and external debt - External debt projection: lowered from 56 percent of GDP in 2005 to 49 percent in 2009. - Constraint on new nonconcessional external debt and guarantees: no more than US$20 million per year (around 2 percent of GDP) for debt contracted or guaranteed on terms falling below the 35 percent concessionality threshold (as set out in the attached Technical Memorandum of Understanding). - Deficit financing driver: availability of highly concessional external loans for the government’s public investment program. - Government seeks international assistance to strengthen debt management practices and project appraisal capacities. ### Fiscal methodology and budgeting - Fiscal methodology: statistical tables follow the 2001 GFS Manual; the government intends to fully adopt this methodology and requests IMF technical assistance. - Expenditure prioritization: contain nonpriority current expenditures, improve domestic revenue mobilization, and limit contingent and quasi-fiscal liabilities; prioritize expenditures in line with PRSP objectives. - Energy subsidies: decision to end all energy subsidies announced as part of the 2006 budget to reduce expenditure pressures and create fiscal space for higher priority spending. ### Public investment and interest expenditure - Government investment projected to remain around 16 percent of GDP over 2006–09, up from 13 percent in 2005. - Lower interest expenditures as debt declines are expected to support reallocation toward the public investment program and poverty reduction efforts. ### Arrears clearance and public financial order - Agreed arrears settlement: 4.8 billion CVEsc (equivalent to 5.5 percent of GDP) to be settled in several installments. - Arrears actions taken: partial payments to oil companies for past subsidies on fuel supplied to Electra; commitment to repay remaining arrears and stay current on payment obligations throughout the program and beyond. - Measures to prevent recurrence: central government to strengthen financial management capacities of municipalities and autonomous public agencies; if arrears persist, central government may meet energy payments on their behalf and deduct amounts from government transfers. ### Revenue mobilization and tax reform - Recent reforms: introduction of VAT and streamlining of import and consumption taxes have reduced distortions and improved revenue performance. - PSI program focus: continue improvements in revenue administration and widen the tax base through rationalization of tax incentives and exemptions. - Exemptions reform: complex system to be reformed so exemptions are granted only according to clearly defined economic criteria corresponding to the national development strategy and regulated under a single law; these reforms will be part of the 2006–07 program. ### Public administration and civil service reforms - Objectives: improve civil service productivity within overall wage bill constraints; align staffing levels with departmental requirements; structure wages to incentivize performance and retain qualified staff without undue private sector wage pressure. - Measures: circular requiring section heads to submit staffing needs and personnel available for mobility to the Directorate-General of Public Administration; new civil servants database established with World Bank help. - Conditional transfers and controls: Autonomous Funds, Autonomous Services, and Public Institutes that fail to submit requested information will not receive monthly transfers; freeze on promotions in public administration; Public Treasury not responsible for costs of staff contracted by local health and education authorities in excess of budget limits. ### Strengthening budget process and public financial management - Reforms influenced by CFAA action plan (with World Bank, Netherlands, other donors): develop new national plan of public accounts; introduce a medium-term expenditure framework; strengthen public procurement practices; introduce a new fiscal register. - SIGOF system: provides a tool for real-time control of budget execution and monitoring; government intends to support further development and expansion of SIGOF. - Authorities seeking additional external assistance to implement these initiatives. ### Energy policy and sector measures - Policy objectives: improve quality of life, competitiveness, stable energy supplies, and environmental preservation; promote conservation and alternative energy sources to reduce dependence on oil imports. - Regulatory and institutional actions: - Strengthen legal and regulatory structures to support a competitive energy market, safeguard consumers, and increase discipline and transparency; develop specific legal and regulatory framework for electricity and fuel subsector. - Reinforce institutional capacities for energy administration. - ARE (autonomous economic regulatory authority) has full authority to establish a tariff policy reflecting costs and providing incentives for efficiency gains; ARE guaranteed implementation of automatic tariff adjustment mechanism by June 1, 2006. - Investment in energy infrastructure: government seeks cooperation of Electra to implement investment plan and calls on donor support. ### Monetary policy and reserves - Monetary policy anchor: safeguard the exchange rate peg with the euro as anchor for low inflation. - Reserve accumulation target: support a further build-up of international reserves of at least 0.1 months of prospective imports per year—equivalent to around ½ percent of current GDP. - Operational improvements: strengthen framework for monetary policy, develop intermediate monetary indicators, and build in-house capacity for tracking large external capital flows including interest sensitivity of emigrant deposits and other private flows. ### Financial sector reforms and supervision - Action Plan: multidisciplinary task force organized by the BCV to guide reforms, considering recommendations of a November 2005 MFD technical assistance mission. - Commitments: - Ensure sufficient growth in institutional capacities for regulation and supervision. - Develop IFIs at a careful pace with measures to protect the system from financial abuse and safeguard Cape Verde’s reputation and access to the international financial system. - Apply same prudential standards to IFIs engaging in transactions with residents as to domestic banks. - Bring legislative and institutional framework, including AML/CFT, into line with international standards; Action Plan to be discussed with stakeholders and donors to secure technical and financial support. ### Credit growth, access to finance, and competition - Objectives: reduce cost of capital; enhance regulatory and legislative framework to protect lenders; strengthen banks’ capacity for project-based lending; improve credit risk management; expand access to credit for SMEs; increase competition in the financial market. ### Policies for 2006–07 — fiscal targets and domestic debt - Domestic debt target: reduce domestic debt to 20 percent of GDP by 2009. - Government net domestic borrowing limits: at most 0.8 percent of GDP in 2006 (contributing to budgeted arrears clearance of 1.7 percent of GDP) and 0.9 percent in 2007. - Projected domestic debt, net of deposits but including arrears: decline from 32.7 percent of GDP at end-2005 to 25 percent at end-2007. ### Specific fiscal measures for 2006–07 - Rationalize and streamline tax incentives and exemptions; submit draft legislation to the National Assembly by mid-2007. - Implement automatic mechanism to adjust electricity and water tariffs in line with input costs and efficiency gains; ARE guaranteed implementation by June 1, 2006. - Complete privatization agenda: privatization of EMPROFAC, ENAPOR, and INTERBASE expected within 2006; TACV restructuring under a one-year consultancy contract beginning in June 2006 with privatization expected in 2007. - Establish a macroeconomic policy unit in the Ministry of Finance and Public Administration, to be established and staffed by December 2006. - Strengthen internal and external audit processes: complete and implement laws on reorganization and mandates of the TdC, and the National Chart of Public Accounts as first-year priorities. ### Monetary and financial sector policies for 2006–07 - Gross international reserves of the BCV programmed to increase by CVEsc 2.1 million in 2006 and CVEsc 2.3 million in 2007 (to 3.2 months of prospective imports). - Credit and money targets: expected expansion in credit to the private sector in the range of 14 percent in 2006 and 2007; broad money expected to expand in line with nominal GDP growth. - Central bank instruments: utilize required reserves, standing facilities, and open market type operations to control liquidity and achieve monetary targets. - Tracking emigrant deposits: BCV will move forward during 2006–07 in tracking gross inflows and outflows of emigrant deposits to analyze interest sensitivity. ### Financial sector priorities for 2006–07 - Continue to expand institutional capacity of the BCV to conduct supervision. - Sign formal information sharing agreements with home country supervisors of subsidiaries and branches established in Cape Verde. - Review and reform as necessary the legislative and regulatory framework of IFIs, including licensing procedures and criteria, secrecy provisions, and branching into third countries. - Amend AML/CFT legislation as necessary to bring it at par with the 2003 FATF/CFT standards. - Authorities committed to addressing these priorities by mid-2007. *Source: _cr06334 - 13. This fiscal stance would allow external debt to be lowered from 56 percent of (IMF PDF).* ### 30. Program implementation will be monitored according to assessment criteria and ### _cr06334 - 30. Program implementation will be monitored according to assessment criteria and ### Monitoring framework and review schedule - Program implementation will be monitored according to assessment criteria and benchmarks presented in Tables 1 and 2 (attached). - Assessment criteria include the equivalent of the standard performance criteria concerning the exchange and trade system that apply in Fund financial arrangements. - Review frequency and timing: - Two reviews per annum initially, with the first review expected to be completed by end-November 2006 based on end-September 2006 assessment criteria and benchmarks. - Second review by end-February 2007 based on end-December 2006 criteria. - Third review by end-August 2007 based on end-June 2007 criteria. - Reviews will proceed on a half-yearly basis thereafter. - The quantitative criteria will be monitored on a quarterly basis. ### Quantitative assessment criteria (selected items and numeric targets / values) - Ceilings and floors (selected table entries shown in the source): - Floor on net international reserves of the Bank of Cape Verde (BCV): 137.0 - Ceiling on the accumulation of new domestic payment arrears by the central government: 5.3 (initial/programmed level) and 0.0 (indicative/targets across quarters) - Ceiling on the accumulation of new external debt arrears by the central government: 0.0 (continuous/quarterly targets) - Ceiling on the contracting or guaranteeing of non-concessional external debt with original maturity of more than one year by the central government: 10.0; 10.0; 20.0; 5.0; 10.0; 15.0; 20.0 (values shown in table across columns) - Ceiling on the outstanding stock of nonconcessional external debt with a maturity of less than one year by the central government: 0.0 (shown across quarters) - Memorandum item: Program assumptions (selected quarterly cumulative flows) - Nonproject external financial assistance, including credit line (program assumption): 1.6; 2.3; 3.1; 0.5; 1.0; 1.6; 2.1 - External debt service: 1.4; 2.1; 2.8; 0.7; 1.4; 2.1; 2.8 - Clearance of end-2005 stock of domestic arrears: 5.3; and quarterly figures shown: -0.9; -1.3; -1.7; -0.3; -0.6; -0.9; -1.2 - Other table values (selected central bank/net domestic asset entries): - Ceiling on net domestic assets of the central bank: 5.8; and quarterly values: -0.4; -0.6; -0.9; -0.2; -0.4; -0.6; -0.8 - Ceiling on net domestic borrowing of the central government (excluding borrowing for clearance of arrears and net late payments): sample quarterly values shown: -0.9; -1.4; -1.8; -0.1; -0.1; -0.2; -0.2 ### Definitions, adjusters, and reporting requirements (high-level) - Net Domestic Borrowing (excluding clearance of arrears and net late payments) - Defined as the cumulative change since start of calendar year of net credit to central government from banking and nonbanking sectors less (1) cumulative clearance during the year of stock of arrears as of end-2005 and (2) cumulative payments during the first three months of the calendar year of expenses authorized by the previous year’s budget, plus expenses accrued during the current year to be paid during the first three months of the next calendar year as provisioned in the budget law (late payments or atrasados). - The ceiling will be adjusted downward (upward) by cumulative downward (upward) deviations in external debt service and upward (downward) by cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. - Net credit to the central government excludes INPS and claims on the Trust Fund (TCMFs). - Reporting: quarterly data compiled by the Ministry of Finance and Economic Planning, to be submitted not later than five weeks after the end of each quarter. Required items (i)–(x) include government domestic revenue by category; external budget support grants; government expenditure; gross payment and gross accumulation of domestic accounts payable (atrasados); external loan receipts and principal payments; external arrears payments and accumulation; bank and nonbank financing; privatization and land sale receipts; and any other revenue, expenditure, or financing not included above. - Privatization and land proceeds definition: all monies received by government from sale or concessioning of public company/organization/facility, sale of government land, liquidation of public company, less restructuring costs. - Net Domestic Assets (NDA) of BCV - NDA defined as reserve money minus net foreign assets of the BCV, evaluated at current end-of-period exchange rates. - Reserve money comprises bank reserves and deposits of monetary institutions and private sector with BCV, and cash in circulation. - Ceiling on cumulative change in NDA from start of calendar-year 2006 is an assessment criterion; adjusters identical in formulation to those for net domestic borrowing. - Reporting: preliminary monthly balance sheets of BCV and consolidated commercial banks transmitted monthly with maximum delay of five weeks; definitive BCV monthly balance sheet provided as soon as available. - Nonconcessional External Debt (contracted or guaranteed by central government) - Ceilings on medium- and long-term, and short-term, nonconcessional external debt constitute continuous assessment criteria. - Nonconcessional external debt is debt with grant element < 35 percent, calculated using CIRRs published by the OECD DAC. - Exclusions: debt rescheduling and debt reorganization; Portuguese government’s precautionary credit line in support of exchange rate peg; borrowings from the Fund; normal short-term (less than one year) import-related financing. - Central government will not guarantee external debt contracted by state enterprises; policy of not guaranteeing private sector external debt maintained. - Reporting: government will consult with Fund staff before assuming any liabilities where instrument classification is uncertain; details of all new external debt (including guarantees), terms and creditors, provided quarterly within five weeks of end of each quarter. - Net International Reserves (NIR) of BCV - NIR defined as gross international reserves of BCV net of external reserve liabilities, calculated at current exchange rates. - Gross reserves include gold, SDRs, reserve position at IMF, foreign exchange, traveler’s checks, demand and short-term deposits at foreign banks, fixed-term deposits abroad liquidable without penalty, any holdings of investment-grade securities. - External liabilities comprise liabilities to nonresidents with original maturity < 1 year, net off-balance-sheet positions, arrears on principal or interest to external creditors and suppliers, and purchases from the IMF. - Program floors for NIR adjusted upward (downward) by cumulative downward (upward) deviations in external debt service and downward (upward) by cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions; flows valued at current exchange rates for adjusters. - Reporting: NIR table prepared by BCV transmitted on weekly basis with maximum delay of two weeks. - Nonaccumulation of new domestic and external payments arrears - Government will not accumulate any new domestic payments arrears; domestic payments obligations deemed in arrears if unpaid beyond normal grace period of 60 days (30 days for government salaries and debt service) unless amount/timing is under good faith negotiation or specified otherwise by budget law/contract. - Government will not accumulate any new external payments arrears on a continuous basis. - Reporting: Ministry of Finance and Economic Planning to submit quarterly detailed table of stock of domestic payments arrears, including accumulation, payment, rescheduling and write-off of domestic payments arrears during the quarter, within four weeks after end of quarter. - External arrears data (debt-service payments; external arrears accumulation and payments) transmitted quarterly within five weeks of end of quarter; government to inform Fund staff immediately of any accumulation of external arrears. ### Structural conditionality (Table 2 summary) - Structural Assessment Criterion - Reduce fiscal risks: Complete implementation of the automatic utility tariff adjustment mechanism — Timing: End-September 2006. - Structural Benchmarks (selected) - Strengthen financial regulations: Complete Action Plan of task force assessing measures to ensure financial sector regulation and supervision is in line with best international practice, including provisions applying to IFIs and AML/CFT — Timing: End-September 2006. - Strengthen fiscal strategy: Establish macroeconomic policy unit in the Ministry of Finance and Public Administration — Timing: End-December 2006. - Strengthen financial supervision: Sign formal information sharing agreements with home country supervisors of subsidiaries and branches established in Cape Verde — Timing: End-December 2006. - Improve budget prioritization: Implementation of the MTEF — Timing: End-June 2007. - Strengthen financial regulations: Implement recommendations of task force on financial sector reform — Timing: End-June 2007. - Streamline tax incentives: Submit draft legislation to National Assembly on streamlining of tax incentives and exemptions — Timing: End-June 2007. - Strengthen fiscal control: Implement laws to strengthen the Court of Auditors (TdC) and National Chart of Public Accounts — Timing: End-June 2007. - Automatic utility tariff adjustment mechanism (completion criteria) - Deemed complete when: (i) technical specifications, including adjustment schedule and specification of cost changing events, have been agreed between Electra and ARE; (ii) details published; (iii) tariff levels brought in line with agreed mechanism; (iv) ARE’s authorization of tariff adjustments reflects full and transparent application of the mechanism; and (v) ARE publishes its decisions on tariff adjustments without delay. ### Other data and documentation requirements - Data transmission frequencies and deadlines: - Exports and imports (volume and prices), compiled by Director of Customs and BCV: quarterly, within five weeks after end of each quarter. - Preliminary quarterly balance of payments, compiled by BCV: within five weeks after end of each quarter. - Monthly disaggregated consumer price index (INE): monthly, within five weeks after end of each month. - Documentation of all measures taken by government to meet assessment criteria or indicative benchmarks: transmitted to Fund staff within one week after the day of implementation. - Additional reporting notes: - Details of all new external debt (including guarantees), indicating terms of debt and creditors, provided on a quarterly basis within five weeks of the end of each quarter. - BCV preliminary monthly balance sheets and consolidated commercial bank balance sheets transmitted monthly with maximum delay of five weeks; NIR table weekly with maximum delay of two weeks. *Source: APPENDIX I, ATTACHMENT II: CAPE VERDE—TECHNICAL MEMORANDUM OF UNDERSTANDING (excerpts) from the provided PDF content.* ### APPENDIX II: CAPE VERDE—EXTERNAL AND PUBLIC DEBT ### APPENDIX II: CAPE VERDE—EXTERNAL AND PUBLIC DEBT SUSTAINABILITY ANALYSIS (DSA) ### Background - The DSA uses the Fund-World Bank debt sustainability framework for low income countries; previous DSA was at end-2004. - Total public debt has been above 80 percent of GDP for most of the last decade. - At end-2005: - Total public debt stood at almost 90 percent of GDP. - Interest payments accounted for nearly 10 percent of domestic revenues (2.2 percent of GDP). - External public debt: - Peaked at 64 percent of GDP in 2001; decreased to 54 percent of GDP at end-2005. - Creditor composition at end-2005: 79 percent multilateral, 18 percent bilateral, less than 1 percent commercial. - Major multilateral creditors: World Bank (IDA), African Development Fund, BADEA. - Major bilateral creditors: Portugal, Russia, Germany (accounted for over 65 percent of bilateral debt). - Central government net domestic debt including arrears amounted to 33 percent of GDP at end-2005; 30 percent of this was short term. - Commercial banks held 55 percent of total government debt. - INPS held 26 percent of debt to nonbanks. - Private external debt contracted is believed to be around US$25 million; outstanding amount and terms are not known. - Cape Verde is not eligible for HIPC assistance nor MDRI debt forgiveness; eligibility for PRGF and IDA concessional financing is based on the small island exception. ### Assumptions and Alternative Scenarios - Medium-term and long-term macroeconomic assumptions agreed with the authorities and Fund/Bank staff: - Long-term real GDP growth expected to average 5 percent. - Inflation gradually decreases to around 2 percent annually. - Exports projected to grow by around 9 percent a year on average (below historical average). - Grants assumed to decrease to 5 percent of GDP by 2026. - Graduation from low income country status in 2008 may worsen new borrowing terms. - Baseline borrowing assumptions: - No commercial borrowing in 2006–09. - By 2026: multilaterals account for 30 percent of total borrowing; commercial borrowing accounts for 40 percent. - Concessionality of new borrowing decreases from 27 percent in 2006 to 8 percent by 2026. - Alternative scenario (to assess shortfall of highly concessional loans): - Up to US$20 million per year provided on commercial rather than highly concessional terms over 2006–09. - In the long run, commercial loans account for 60 percent of total borrowing in 2026. - DSA updates since 2005 include: - Inclusion of government guaranteed domestic debt at end-2005. - Newly recognized domestic arrears and cross-debt of CV Esc 5.3 billion included. - Revised projections on INPS contributions after pension reform (January 1, 2006). - Elimination of oil subsidies from projections (government 2006 budget decision). - WEO oil price projections updated as of winter 2006 baseline. - Selected macroeconomic baseline assumptions (historical average 1996–2005 and 2006–11 where shown): - Historical Average (1996–2005): Real GDP growth 6.8; Inflation 2.6; Exports of G&S (U.S. dollars terms) 14.8; Imports of G&S 8.9; Current Account Balance (percent of GDP) -9.3; Foreign direct investment (percent of GDP) 3.5; Public sector revenue and grants (percent of GDP) 30.3. - 2006–2011 projections shown in Table 2 include, for example, Real GDP growth: 5.5 (2006), 6.0 (2007), 6.3 (2008), 6.6 (2009), 6.6 (2010), 6.3 (2011); Inflation: 6.2 (2006), 0.2 (2007), 0.3 (2008), 2.1 (2009), 2.1 (2010), 2.1 (2011); Grant element of new external borrowing: 27.3 (2006), 27.5 (2007), 29.2 (2008), 31.1 (2009), 26.6 (2010), 25.8 (2011). - Exchange rate (national currency per U.S. dollar, p.a.): 101.3 (historical average), 93.1 (2006), 92.9 (2007), 92.6 (2008), 92.4 (2009), 92.3 (2010), 92.1 (2011). - Current Account Balance (percent of GDP) projections: -6.8 (2006), -9.9 (2007), -10.9 (2008), -11.0 (2009), -9.9 (2010), -7.3 (2011). - Foreign direct investment (percent of GDP) projections: 2.1 (2006), 3.4 (2007), 4.0 (2008), 4.4 (2009), 2.0 (2010), 2.1 (2011). ### External Debt Sustainability: Findings and Stress Tests - Baseline results: - NPV of debt projected to increase minimally from 32 to 34 percent of GDP. - NPV of debt-to-exports projected to decrease from 91 to 83 percent. - Debt service payments increase from 7 to 11 percent of exports. - Alternative scenario: - Debt service-to-exports ratio increases to 15 percent over the projection horizon. - Sensitivity to shocks: - Standard bound tests suggest low vulnerability to debt distress under baseline and plausible shocks. - A one-time 30 percent exchange rate depreciation relative to the baseline would bring the NPV of debt-to-GDP very close to the threshold of 50 percent and keep it permanently at this level. - Worsening borrowing terms could increase the NPV of debt-to-exports to 126 percent. - A decrease in transfers by one standard deviation compared to the historical average would push the debt service-to-export ratio from 7.6 percent in 2006 to nearly 12 percent in 2023. - Thresholds and Cape Verde indicators (selected): - NPV of debt in percent of GDP thresholds for "strong performer" classification: 50 (threshold); Cape Verde: 32 (2006), 33 (2016), 34 (2026). - NPV of debt in percent of exports thresholds: 200 (threshold); Cape Verde: 91 (2006), 68 (2016), 83 (2026). - NPV of debt in percent of revenues thresholds (including grants): 300 (threshold); Cape Verde: 95 (2006), 119 (2016), 120 (2026). - Debt service in percent of exports threshold: 25; Cape Verde: 7 (2006), 9 (2016), 11 (2026). - Debt service in percent of revenues threshold (including grants): 35; Cape Verde: 7 (2006), 11 (2016), 15 (2026). ### Fiscal Sustainability: Findings and Stress Tests - Fiscal DSA assumptions: - Ongoing fiscal consolidation in the context of lower grant inflows. - PSI program goal: sizeable reduction in domestic debt as a share of GDP. - Domestic debt projected to decrease to 16 percent of GDP by 2026. - Domestic public revenues projected constant at 24 percent of GDP in the long term. - Resulting overall fiscal deficit in the projection period averages 3.1 percent of GDP. - Baseline fiscal results: - NPV of debt-to-GDP ratio decreases to 50 percent in 2026 from 60 percent in 2006. - NPV of debt-to-revenues shows a small improvement. - Debt service increases from 10 to 20 percent of revenues by 2026 (reflecting worsening borrowing terms). - Alternative scenario: debt service rises to 22 percent of revenues by 2026. - Stress-test outcomes: - The most extreme test (primary balance stays at historical average minus 1 standard deviation in 2007–08) increases NPV of debt-to-GDP to 73 percent in 2008 and keeps it above baseline throughout projection period. - The same shock stabilizes NPV of debt-to-revenues at around 200 percent in the long run, while increasing debt service-to-revenues to 23 percent by 2026. ### Long-run Contingent Liability Risks - World Bank simulations indicate that the INPS pension system will move into a cash flow deficit by 2037. - While beyond the DSA projection period, this has negative implications for contingent fiscal liabilities and public debt over the long run. - Early efforts to address pension imbalances would lower the eventual burden of adjustment. *Prepared jointly by staff of the IMF and the World Bank using Cape Verdean authorities' data and staff estimates.* ### 15. In summary, the debt sustainability analysis suggests that Cape Verde is not ### _cr06334 - 15. In summary, the debt sustainability analysis suggests that Cape Verde is not ### Summary conclusion - The debt sustainability analysis suggests that Cape Verde is not likely to face debt distress despite the rising debt service burden, given that sustainability indicators are kept below the thresholds over the forecast horizon. - The analysis incorporates cautious assumptions on macroeconomic variables and builds in a considerable worsening of borrowing terms in the long run. - These results are contingent upon the reduction of currently high debt ratios and highlight the need for prudent fiscal and debt management to ensure that debt service costs do not crowd out high priority, poverty reducing spending. ### Debt indicators and projections (selected) - External debt (nominal), percent of GDP: 64.3, 59.3, 51.3, 51.4, 51.0, 50.2, 47.7, 46.0, 44.5, 43.3, 38.1 (historical/projection sequence shown in table). - NPV of external debt (percent of GDP) in projection years: 31.0, 31.9, 32.4, 32.5, 31.2, 30.8, 30.3, 33.3, 33.9 (selected entries from table). - NPV of debt-to-exports ratio (percent): 85.5, 90.9, 94.7, 96.4, 95.9, 91.6, 89.1, 95.8, 83.0 (selected entries). - Debt service-to-exports ratio (percent): 10.5, 11.3, 8.8, 7.3, 7.0, 7.5, 7.6, 6.2, 6.4, 8.8, 10.7 (selected entries). - Total gross financing need (billions of U.S. dollars): 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.2, 0.4 (selected entries). ### Stress tests, alternative scenarios, and bounds - Figure II.2 and Table II.4 series present baseline, "primary balance at 2005 level", and "most extreme stress test" paths for: - Chart 1: NPV of Debt-to-GDP Ratio (percent) across 2006–2026. - Chart 2: NPV of Debt-to-Revenue Ratio (percent) across 2006–2026. - Chart 3: Debt Service-to-Revenue Ratio (percent) across 2006–2026. - Table II.4a (NPV of debt-to-GDP ratio; baseline and scenarios): baseline sequence includes values such as 32, 32, 32, 31, 31, 30, 33, 34 (selected tabular entries). - Alternative scenario A2 ("New public sector loans on less favorable terms in 2007–2026") shows larger NPV outcomes (e.g., entries such as 33, 33, 35, 34, 34, 35, 42, 52 in the table). - Bound tests include shocks such as: - B1: Real GDP growth at historical average minus one standard deviation in 2007–08. - B2: Export value growth at historical average minus one standard deviation in 2007–08. - B6: One-time 30 percent nominal depreciation relative to the baseline in 2007. - Memo item: grant element assumed on residual financing (applies to stress scenarios except A2) shows repeated entry "8". ### Public sector debt sustainability (selected indicators) - Public sector debt (percent of GDP): historical/projection sequence includes values such as 86.5, 90.7, 88.3, 79.9, 77.3, 74.3, 69.2, 65.7, 62.6, 60.6, 60.0, 59.3, 58.6, 57.8, 57.2, 56.6, 56.1, 55.7, 55.3, 54.7, 50.7. - Foreign-currency denominated share of public sector debt (percent of GDP): 57.5, 54.0, 54.0, 51.3, 50.9, 50.1, 47.7, 46.0, 44.5, 43.4, 43.3, 43.0, 42.4, 41.7, 41.0, 40.4, 39.8, 39.4, 38.9, 38.4, 34.6. - NPV of public sector debt (percent of GDP): sample projection entries include 60.4, 58.7, 56.6, 52.8, 50.5, 48.4, 49.8, 49.9, 49.9, 50.0, 50.1, 50.2, 50.3, 50.3, 50.4, 50.4, 50.2, 49.9. - Gross financing need (percent of GDP): 35.6, 25.4, 35.9, 37.5, 33.3, 32.0, 28.9, 26.7, 25.0, 24.4, 23.8, 23.2, 22.8, 22.6, 22.7, 22.7, 22.7, 22.8, 22.8, 22.7, 22.5. - Debt service-to-revenue ratio (percent): 23.4, 7.3, 14.9, 11.0, 10.5, 10.5, 10.0, 11.0, 12.0, 14.5, 15.2, 15.9, 16.7, 17.3, 17.8, 18.1, 18.6, 19.0, 19.3, 19.5, 19.5 (selected entries). ### Policy implications and recommendations - Prudent fiscal and debt management is needed to reduce currently high debt ratios. - Ensure debt service costs do not crowd out high priority, poverty reducing spending. - Manage prospective deterioration in borrowing terms (scenario A2) to avoid higher debt burdens evident under less favorable financing. ### Key macroeconomic assumptions (selected) - Real GDP growth (percent): multiple entries including 4.7, 4.4, 5.8, 6.8, 2.2, 5.5, 6.0, 6.3, 6.6, 6.6, 6.3, 6.2, 5.0, 5.0, 5.0 (table sequence). - GDP deflator in U.S. dollar terms (change in percent): 25.2, 8.8, 0.5, 0.9, 11.0, 1.7, 1.5, 1.7, 3.2, 2.6, 2.7, 2.2, 2.0, 2.0, 2.0. - Effective interest rate (percent): 1.3, 1.2, 1.1, 1.5, 0.3, 1.4, 1.2, 1.2, 1.3, 1.3, 1.4, 1.3, 2.1, 3.2, 2.4 (selected entries). - Growth of exports of G&S (U.S. dollar terms, percent): 27.2, 15.8, 20.7, 14.8, 11.7, 3.8, 5.0, 6.5, 6.4, 12.6, 10.5, 7.5, 9.0, 9.0, 8.4. - Growth of imports of G&S (U.S. dollar terms, percent): 28.9, 17.2, 0.6, 8.9, 11.8, 9.2, 9.4, 9.3, 8.6, 8.3, 6.7, 8.6, 6.5, 6.7, 5.9. - Grant element of new public sector borrowing (percent): 27.3, 27.5, 29.2, 31.1, 26.6, 25.8, 27.9, 8.7, 7.6, 8.2 (selected entries). *Source: Staff projections and simulations as presented in the provided chapter tables and figures.* ### APPENDIX III: RELATIONS WITH THE FUND ### APPENDIX III: RELATIONS WITH THE FUND ### I. Membership Status - Joined: November 20, 1978 - Article XIV ### II. General Resources Account - Quota (SDR Million): 9.60 - Quota (%): 100.00 - Fund holdings of currency (SDR Million): 9.59 - Fund holdings of currency (%): 99.93 - Reserve Position (SDR Million): 0.02 - Reserve Position (%): 0.17 - Holdings Exchange Rate: (not specified in source) ### III. SDR Department - Net cumulative allocation (SDR Million): 0.62 - Net cumulative allocation (%): 100.00 - Holdings (SDR Million): 0.01 - Holdings (%): 1.04 ### IV. Outstanding Purchases and Loans - PRGF Arrangements (SDR Million): 8.64 - PRGF Arrangements (%Quota): 90.00 ### V. Latest Financial Arrangements - PRGF: Approval Date: Apr 10, 2002; Expiration Date: Jul 31, 2005; Amount Approved (SDR million): 8.64; Amount Drawn (SDR million): 8.64 - Stand-by: Approval Date: Feb 20, 1998; Expiration Date: Mar 15, 2000; Amount Approved (SDR million): 2.50; Amount Drawn (SDR million): 0.00 ### VI. Projected Payments to Fund (SDR million, based on existing use of resources and present holdings of SDRs) - Forthcoming years and amounts: - 2006 Principal: 0.12 - 2007 Principal: 0.49 - 2008 Principal: 0.98 - 2010 Principal: 1.48 - Charges/Interest by year: - 2006: 0.05 - 2007: 0.07 - 2008: 0.06 - 2009: 0.06 - 2010: 0.05 - Total by year: - 2006: 0.05 - 2007: 0.19 - 2008: 0.56 - 2009: 1.04 - 2010: 1.53 ### VII. Implementation of HIPC Initiative - Not Applicable ### VIII. Implementation of MDRI Assistance - Not Applicable ### IX. Safeguards Assessments - The Bank of Cape Verde (BCV) was subject to a safeguards assessment with respect to the PRGF arrangement approved on April 10, 2002. - A safeguards assessment of the BCV was completed on December 9, 2002. - The assessment identified vulnerabilities in reporting, internal control, and audit areas, and made appropriate recommendations (reported in “Semi-Annual Review of PRGF, PRGF-HIPC, and SDA Investments,’’ issued on November 11, 2003). - The BCV has implemented all safeguards assessment recommendations and has requested a new, voluntary, safeguards assessment. ### X. Exchange Arrangements - Currency: Cape Verde escudo - Peg: Pegged to the euro at a rate of CVEsc 110.3 per EUR 1 since January 4, 1999. - Article VIII: Cape Verde accepted the obligations under Article VIII of the Articles of Agreement effective July 1, 2004. - Current system: Cape Verde maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. ### XI. Article IV Consultation - Discussions for the 2005 Article IV consultation together with the sixth and final review under the PRGF arrangement were held in Praia during March 8–23, 2005. - The Executive Board concluded the discussions of the Article IV consultations and completed the sixth review under the PRGF arrangement on May 25, 2005 (Country Report No. 05/320, dated 05/12/05). ### XII. Technical Assistance - Since 1985, technical assistance has been provided to the Bank of Cape Verde (BCV), the Ministry of Finance, and the National Institute of Statistics in several areas: - BCV received TA from MFD in organization and methods, management of external debt, monetary and banking statistics, accounting, credit, and foreign exchange operations, management of public debt, separation of BCV functions, and exchange rate regime choice. BCV also received TA from STA in monetary and balance of payments statistics. - Ministry of Finance received TA from FAD in organization and budgetary procedures, budgeting, tax policy, and tax administration. - National Institute of Statistics received TA in national accounts and price statistics. - Participation and projects: - Cape Verde is a participant in STA’s GDDS Regional Project for Lusophone Africa; metadata were posted on the DSBB in February 2004. - Receiving TA to implement the GDDS plan for improvement in the context of this project. - Most recent TA missions and activities: - FAD: - June 2004 follow-up visit to help authorities move to a VAT, rationalize the import tariff and overhaul domestic indirect tax system; many visits and a two-year resident advisor supported this effort. - October 2004: one mission to review tax administration, including VAT implementation, and one mission to assist assessment of tax exemptions and incentives. - STA: - National accounts (November 2003 and January–February 2006) - Balance of payments statistics (February 2004) - Government finance statistics (March 2004, April 2006) - Price statistics (June 2004, May–June 2006) - MFD: - Safeguards assessment (July 2003) - Accounting, financial systems regulations, monetary operations and liquidity management (April and May 2004) - Banking supervision, liquidity management, exchange regime and reserves management (November 2005, March–April 2006, and June 2006) ### XIII. Resident Representative - None *Source: APPENDIX III: RELATIONS WITH THE FUND (As of May 31, 2006).* ### 7. Benefiting from TA support under the GDDS project for Lusophone Africa, ### 7. Benefiting from TA support under the GDDS project for Lusophone Africa ### Fiscal data: progress and submissions - Draft government accounts for 1998–2003 have been submitted to parliament for transmittal to the Court of Auditors (TdC). - Provisional quarterly accounts for 2004 and 2005 have been submitted to the parliament. - Capacity constraints have prevented the TdC from making rapid progress in the final auditing of the accounts. ### Fiscal data: outstanding quality and reporting issues - Provisional quarterly fiscal accounts are subject to large statistical discrepancies. - Recording of arrears accumulations and clearance operations is not in line with best practices. - Significant delay in donor reporting of project related financing prevents timely closure of accounts. - Separate identification of budget and project financing is not possible under current reporting standards. ### Government finance statistics (GFS) system upgrades and institutional coordination - The GFS compilation system is being upgraded as part of ongoing reforms of the government’s management and information systems. - Most accounts previously held with commercial banks have been consolidated at the central bank level. - Government agencies’ reporting, and coordination among the treasury, the budget directorates, and the central bank, has improved. - The Ministry of Finance and Planning is the single point of commitment, execution, and monitoring of public expenditure. ### Coverage of extra-budgetary units and transition to GFSM 2001 - Steps for improving the coverage of extra-budgetary units were outlined during the STA GFS mission of April 2006. - Important advances were made in simplifying the conversion of budgetary classifications to GFSM 2001 classifications. - Technical problems with institutional sectorization and budgetary registers remain to be resolved. - Work remains to be done to: - change statistics on cash basis to accrual basis, and - define a methodology to obtain the stocks of assets and liabilities in terms of GFSM 2001. ### Money and banking statistics - The quality of the monetary and financial statistics is adequate in terms of accuracy and timeliness. - Further progress needed for the BCV to start reporting monetary statistics to STA using the standardized report forms (SRFs), fully aligned with the Monetary and Financial Statistics Manual recommendations. - Interest rate data need improvement: - Published lending rates are based on posted lending rates and do not adequately reflect actual weighted lending rates as customers frequently obtain better terms. - Gaps in tracking the source and direction of changes in emigrant deposits cause difficulties for gauging the appropriateness of the monetary policy stance. ### Balance of payments statistics - With STA technical assistance, accuracy, periodicity and timeliness of balance of payments statistics compiled by BCV have continued to improve. - Greater use of surveys, combined with the International Transactions Reporting System implemented by the BCV, has expanded data sources and statistical coverage and largely follows the recommendations of the 5th edition of the Balance of Payments Manual. - Reporting of BOP data to AFR has been regular; quarterly data for the first quarter of 2006 are already disseminated on the BCV website. - Timeliness of reporting of BOP statistics to STA needs improvement; the latest data published in IFS refer to 2003. ### External debt and arrears - Despite the recent revision of historical data on external debt, significant weaknesses in accounting still exist and hamper the preparation of reliable debt sustainability analyses. - Multilateral debt statistics regularly differ from data received by creditors. - Debt service projections cannot be reconciled with the debt stock. ### Cape Verde: Common Indicators Required for Surveillance (As of June 27, 2006) — selected observation and reporting frequencies - Exchange Rates — Date of latest observation: May-06; Date received: May-06; Frequency of Data: D; Frequency of Reporting: D; Frequency of publication: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: Apr-06; Date received: May-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Reserve/Base Money — Date of latest observation: Apr-06; Date received: May-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Broad Money — Date of latest observation: Apr-06; Date received: May-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Central Bank Balance Sheet — Date of latest observation: Apr-06; Date received: May-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Consolidated Balance Sheet of the Banking System — Date of latest observation: Apr-06; Date received: May-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Interest Rates — Date of latest observation: Apr-06; Date received: May-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Consumer Price Index — Date of latest observation: May-06; Date received: Jun-06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Revenue, Expenditure, Balance and Composition of Financing – General Government — Date of latest observation: Mar-06; Date received: Jun-06; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: Q - Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of latest observation: Mar-06; Date received: Jun-06; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: Q - Stocks of Central Government and Central Government-Guaranteed Debt — Date of latest observation: Mar-06; Date received: Jun-06; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: I - External Current Account Balance — Date of latest observation: Mar-06; Date received: Jun-06; Frequency of Data: Q; Frequency of Reporting: I; Frequency of publication: Q - Exports and Imports of Goods and Services — Date of latest observation: Mar-06; Date received: Jun-06; Frequency of Data: Q; Frequency of Reporting: I; Frequency of publication: Q - GDP/GNP — Date of latest observation: Dec-05; Date received: May-06; Frequency of Data: A; Frequency of Reporting: I; Frequency of publication: A - Gross External Debt — Date of latest observation: Dec-05; Date received: May-06; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: I ### Statement by the IMF Staff Representative (July 31, 2006) — updates - The statement provides an update on economic and policy developments since the issuance of the staff report and notes these developments do not change the thrust of the staff appraisal. - Electra ownership change: - The government of Cape Verde has assumed majority ownership of the major electricity and water public utility, Electra. - Agreement reached on July 24 between the government and the Portuguese consortium EDP/ADP, prompted by the intervention of the Portuguese government. - Under the agreement, EDP/ADP will recapitalize Electra and the company's ownership structure will be changed to give the Cape Verde government and municipalities a majority share. - The agreement does not appear to have fiscal implications for Cape Verde although full details are not yet available. - The authorities have signaled that Electra will continue to be run on fully commercial terms. - United Kingdom debt relief initiative: - The government of the United Kingdom will pay its share (10 percent) of Cape Verde’s debt service to IDA and the African Development Bank (AfDB) from January 1, 2006. - The resources released by this payment amount to just over $0.5 million in 2006 and will be spent on poverty reducing investments in line with Cape Verde’s national poverty reduction plan. *IMF Staff Report content unit: _cr06334 - 7. Benefiting from TA support under the GDDS project for Lusophone Africa* ### 4. CPI inflation was 0.5 percent in the month of June 2006 and 7 percent in the year to ### 4. CPI inflation was 0.5 percent in the month of June 2006 and 7 percent in the year to ### Inflation developments - CPI inflation: 0.5 percent in the month of June 2006 and 7 percent in the year to June. - Monthly components (June 2006): - Food prices: fall of 0.9 percent, reflecting a reversal of recent supply-induced shortfalls in fish, fruit, and vegetables. - Energy and water prices: rise of 7.4 percent. - Recent price dynamics: - After falling for much of 2003–05, prices have recently increased sharply due to temporary, supply-driven factors in food and higher regulated prices for fuel, electricity, and water following elimination of fuel subsidies. - Staff and authorities view some price rises as temporary supply shocks, with inflation expected to fall sharply over the coming year. ### Growth and output - Real GDP growth: - Estimated nearly 6 percent in 2005. - GDP growth in 2006 possibly around 5½ percent (may be slightly weaker than 2005). - Growth drivers: - Increased private investment—especially in tourism-related construction. - Higher execution rate of public investment projects. - Strong inflows of external financing from official and private sources since 2000; growth averaged 5½ percent since 2000 in one statement, and "around 5 percent since 2000" in others. ### External sector and reserves - Current account and reserves: - Current account deficit: declined to 4½ percent of GDP in 2005 (from over 14 percent of GDP in 2004). - Official international reserves: 3 months of prospective imports at end-2005 (up from 2.4 months a year earlier). - Balance of payments and related indicators (selected table entries, 2002–06): - Overall balance of payments (percent of GDP): 6.3, -0.7, 4.1, 5.7, 2.2 (2002–06). - Current account balance (including current grants, percent of GDP): -11.4, -11.1, -14.4, -4.6, -6.9 (2002–06). - Gross reserves (months of prospective imports): 1.9, 1.7, 2.4, 3.0, 3.1 (2002–06). - External debt service (percent of exports): 12.4, 10.5, 11.3, 8.8, 8.2 (2002–06). ### Fiscal performance and public debt - Overall fiscal position: - Overall fiscal deficit (including grants): just over 5 percent of GDP in 2005; table shows overall balance (including grants, percent of GDP): -2.9, -3.5, -2.0, -5.1, -7.1 (2002–06). - Total revenue (percent of GDP): 22.9, 22.0, 23.2, 24.1, 25.1 (2002–06). - Total expenditure (percent of GDP): 34.4, 31.1, 36.1, 36.3, 41.2 (2002–06). - Total grants (percent of GDP): 8.7, 5.5, 10.9, 7.1, 9.0 (2002–06). - Public debt and domestic debt: - External debt (percent of GDP): 56.4, 57.5, 54.0, 55.4, 52.4 (2002–06). - Net domestic debt (percent of GDP): 29.2, 27.3, 35.0, 32.7, 27.2 (2002–06). - Domestic debt declined to 33 percent of GDP at end-2005 (text). - Financing and arrears: - 2005 outturn reflected an increase in provision of concessional external loans and a delay in disbursement of external grants. - Deficit financed in part by government asset sales. - Program target: reduce domestic debt to 25 percent of GDP by end-2007. - Provision to significantly reduce arrears in 2006; one-third of end-2005 stock of arrears expected to be cleared in 2006. - Projected receipts from privatizations and land sales: 3.7 percent of GDP (2006–07 program). ### Monetary and banking sector - Monetary policy stance: - Anchor: safeguard fixed exchange rate peg to the euro. - Program objective: increase gross international reserves by CVESC 2.1 million in 2006 and CVESC 2.3 million in 2007, representing 3.2 months of prospective imports. - Ceilings on growth of domestic assets to be implemented; credit to central government to be reduced to allow increased credit to private sector. - Banking sector and liquidity: - Excess liquidity due to strong capital inflows, lower reserve requirements, and slow private sector credit growth. - Banks increased holdings of foreign assets and pursued domestic lending; Bank of Cape Verde started selling central bank securities to absorb liquidity. - Banking sector assets have grown by 20 percent since 2004 to reach 90 percent of nominal GDP (text). - Remittances estimated at 40 percent of total deposits (text) contributing to excess reserves. - Financial sector reform: - Strengthen operational framework for monetary policy; modernize regulation and supervision of financial institutions. - Task force organized by BCV to draft Action Plan based on Fund advice. - Emphasis on ensuring offshore financial sector development aligns with international best practice; implement AML/CFT legislation and criminalize terrorist financing in line with the UN Convention. ### Structural reforms and regulatory actions - Privatization and restructuring: - Privatization agenda near completion: TACV being restructured in preparation for privatization; bidding process under way for ENAPOR. - Government plan to complete in 2006 sale or liquidation of remaining four public companies. - Energy and utility sector: - Electricity and water tariffs increased as of June 1, 2006: electricity by 25.4 percent and water by 13.3 percent. - Fuel subsidies eliminated in the 2006 budget. - Independent economic regulatory agency committed to full implementation of automatic tariff adjustment mechanism to reflect changes in input costs. - State reacquired a majority shareholding in Electra; Directors emphasized need to avoid fiscal risks and ensure Electra is run on commercial terms under a regulatory framework supporting needed investment. - Other reforms: - Measures to strengthen education, training, health care, sanitation, governance, and infrastructure under the PRSP. - Reforms to improve public financial management and public administration, including macroeconomic policy unit at Ministry of Finance, strengthening internal and external audit. - Labor market flexibility discussions; modern regulatory framework drafted to liberalize telecom; e-government IT deployment to remove administrative obstacles. - Trade reforms and WTO accession decision expected in 2006. ### Policy priorities, projections, and program under the PSI - PSI approval: - IMF Executive Board approved a three-year Policy Support Instrument (PSI) for Cape Verde (concluded July 31, 2006). - PSI intended to support the nation's economic reform efforts, enhance sustainability of growth, maintain macroeconomic stability, and reduce fiscal risks. - Medium-term objectives and projections: - Raise average economic growth to 6–7 percent in 2007–09. - Bring inflation rate close to zero in 2007–08 and stabilize it at 2–3 percent thereafter. - Increase international reserves by 0.1 months of imports per year. - Lower public debt to below 70 percent by 2009. - Key policy measures under PSI: - Increase foreign exchange coverage to strengthen exchange rate peg credibility and resilience. - Decrease domestic debt burden and clear remaining domestic arrears. - Strengthen public finance management capacity, expenditure control, and revenue performance. - Rationalize and streamline tax incentives and exemptions. - Implement automatic mechanism for adjusting electricity and water tariffs. - Establish macroeconomic policy unit at Ministry of Finance. - Finance public investment program primarily through concessional external loans. - Strengthen BCV capacity for surveillance, track emigrant deposits inflows/outflows, and enhance regulation and supervision of financial institutions. - Complete privatization agenda and improve business environment to accelerate private sector-led growth. ### Executive Board assessment and recommendations - Directors' observations: - Government strategy anchored by build-up in international reserves, improved fiscal position despite election pressures, and progress in privatization and structural reforms. - Strengthened macroeconomic stability and policy credibility have supported solid economic growth and development prospects. - Cape Verde remains vulnerable to external shocks and dependent on foreign aid and remittances. - Recommended policy priorities: - Safeguard the exchange rate peg. - Contain fiscal risks and improve public sector management, including drawing up and executing budgets and civil service reform. - Create fiscal space by reducing domestic debt as a share of GDP, rationalizing tax exemptions, and better prioritizing public spending. - Contain the wage bill to achieve budget objectives. - Ensure Electra is operated on commercial terms and under a regulatory framework that supports investment. - Ensure financial sector development, including offshore sector, follows international best practice and implement AML/CFT measures. *International Monetary Fund — Public Information Notice and related staff report excerpts (August 2006).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06334.pdf_