## _cr07223

## Source details

**Canonical URL:** [_cr07223](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07223.pdf)

## Other formats

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---

### Executive summary — main findings
- Program objectives: reducing macroeconomic risks, increasing foreign reserves, lowering public debt.  
- Growth: 2006 GDP growth estimate revised up from 5.8 percent to 6.5 percent.  
- Unemployment: 18.3 percent in 2006, down 6.1 percentage points from 2005.  
- Reserves: reached 3.0 months of prospective imports at end-2006—above program target.  
- Public debt: net domestic debt-to-GDP ratio reduced from 33.5 percent at end-2005 to 28.7 percent at end-2006.  
- Missed assessment criteria:  
  - Net domestic borrowing ceiling exceeded by 0.8 percent of GDP (delayed land sale and privatization proceeds and lower-than-expected profit transfers from public enterprises).  
  - Some accumulation of domestic arrears in late 2006 while arrears-prevention procedures were implemented.  
- Staff recommendation: grant waivers because corrective actions are being taken and increases are expected to be unwound in 2007.

### Recent developments and macro performance
- Monetary and external: BCV sterilization and credit growth drained excess liquidity; large inflows of official assistance, tourism exports, and FDI; net inflows of remittances and emigrant deposits continued.  
- Emigrant deposits: average emigrant time deposit rate at end-2006 was 4.4 percent, 1.5 percent above the euro area rate.  
- Credit growth: largest share to highly collateralized real estate lending and a domestic bank’s purchase of a Portuguese bank claim of €71 million (bought for a present value of €38 million and since restructured; part securitized for local stock market).  
- Fiscal: tax revenues higher than projected; recurrent public spending restrained; public investment program execution record-high (over 80 percent in 2006).  
- Domestic arrears: stock being cleared faster than targeted; hospitals incurred arrears to state pharmaceutical company in Nov–Dec 2006; some Electra arrears remained at end-2006.  
- Corrective measures: monitoring, strengthened budget execution for central government entities, procedures to make payments on behalf of entities incurring arrears and deduct amounts from transfers; municipalities signed MOUs to pay electricity bills on time; planned tax on consumer electricity bills to meet public lighting costs.

### Structural reforms and institutional measures
- Budget, audit, and arrears prevention: improving budget management and audit processes; preventing public sector arrears.  
- Tax reform and administration: reform of tax laws and administration; Large Taxpayers Unit established to be fully operational by mid-2007 (end-June 2007 / end-June 2007 referenced across sections).  
- Regulatory frameworks: strengthening energy and financial sector regulation; automatic adjustment mechanism for electricity and water tariffs published January 2007 and being applied.  
- Public employment and audit institutions: draft public employment law to be submitted to the National Assembly; new law concerning the Court of Auditors (TdC) submitted; Inspectorate General of Finance reinforced.  
- Privatization/market operations: public sale initiated of most remaining government shares in Enacol through the Cape Verde Stock Exchange—the biggest financial operation ever in Cape Verde.

### Macroeconomic framework and projections
- Growth projections: 2007 projection revised up to 6.9 percent; medium-term growth expected to average above 7 percent driven by FDI-led tourism expansion.  
- Inflation: 12-month rate expected to return to low single digits during 2007 as fresh food prices decline.  
- Reserves target: retained target of increasing reserves by at least another 0.1 month of prospective imports in 2007.  
- Domestic debt repayment: 2007 repayment target raised by CVEsc 800 million to unwind higher-than-expected borrowing in 2006; domestic-debt-to-GDP ratio expected to decline to 22.5 percent by year-end.

- Selected macro projections (Real GDP; CPI; reserves; debt; others) — selected series 2005–09:
  - Real GDP: 5.8; 5.5; 6.5; 6.9; 7.5; 7.8
  - Real GDP per capita: 3.8; 3.5; 4.5; 4.9; 5.5; 5.7
  - Consumer price index (annual average): 0.4; 6.2; 5.4; 2.5; 1.8; 1.9
  - Consumer price index (end of period): 1.7; 5.5; 6.2; 0.2; 2.2; 1.8
  - Gross international reserves (millions of euros, end of period): 147.4; 166.4; 193.1; 234.2; 275.1; 325.4
  - Gross international reserves (months of prospective imports): 2.8; 3.1; 3.0; 3.1; 3.2; 3.3
  - Total nominal government debt: 86.6; 80.8; 72.4; 63.5; 58.7; 53.5
  - Domestic debt (including arrears and accounts payable, net of deposits) percent of GDP: 33.5; 28.4; 28.7; 22.5; 22.5; 19.5; 16.8

### Fiscal operations — central government (selected levels and percent of GDP)
- Revenue, grants, and net lending (levels, CVEsc millions): 26,779; 33,437; 31,044; 35,295; 36,964; 39,950; 44,459  
- Domestic revenue (levels): 21,123; 24,604; 25,255; 26,963; 29,871; 33,138; 36,699  
- Tax revenue (levels): 18,601; 21,099; 22,828; 24,178; 26,599; 29,524; 32,764  
  - Income and profit taxes: 5,822; 6,955; 6,952; 7,497; 8,109; 9,096; 10,255  
  - Consumption taxes: 7,390; 8,351; 9,821; 10,140; 11,285; 12,579; 14,060  
  - International trade taxes: 4,231; 4,501; 4,889; 5,458; 5,839; 6,307; 6,889  
- Total expenditure (levels): 32,437; 40,413; 34,924; 39,943; 40,712; 43,933; 47,698  
  - Recurrent expenditure: 18,948; 22,416; 18,908; 22,575; 23,904; 25,079; 27,583  
  - Capital expenditure: 11,073; 16,290; 12,338; 16,340; 15,102; 15,065; 16,089  
    - Foreign financed: 9,204; 12,534; 11,096; 13,487; 12,249; 11,626; 11,841  
    - Domestically financed: 1,869; 3,755; 1,242; 2,853; 2,853; 3,439; 4,248  
- Overall balance, including grants (levels): -5,657; -6,976; -3,880; -4,648; -3,748; -3,983; -3,239  
- Financing — net domestic borrowing (levels): 713; 830; 301; 639; -602; -1,402; 300; 300

### Monetary policy actions and prospects
- BCV liquidity management: since December 2006, BCV aims to fully sterilize liquidity impact of reserve accumulation by issuing 14-day and 6-month central bank bills.  
- Policy-rate approach: BCV offering 14-day bills at a fixed interest rate set at a margin below the Euribor to create an official policy rate and reduce incentives for commercial banks to place excess liquidity abroad.  
- Reserve requirement: lowered from 15 to 14 percent in late March 2007.  
- BCV intentions: if necessary, fully sterilize liquidity increases and explore a formal operating framework based on closer monitoring and targeting of external interest rate differentials.  
- Banks: excess liquidity eased due to sterilization and rapid private credit growth; banks face emigrant withdrawal requests and increased domestic competition; increased private sector access to international capital and offshore institutions has added interest rate pressures.

- Monetary and banking aggregates (selected 2005–09 levels):  
  - Broad money M2: 72,644; 82,511; 85,536; 99,335; 111,152; 124,710  
  - Credit to private sector: 34,040; 38,751; 44,205; 51,042; 58,150; 65,854  
  - Emigrant deposits (levels): 28,318; 31,339; 31,293; 36,342; 40,665; 45,625  
  - Bank of Cape Verde net international reserves (millions of euros): 137.0; 156.0; 183.3; 224.4; 266.0; 317.4

### Risks, uncertainties, and policy responses
- Key risks identified:  
  - Possible withdrawal of emigrant deposits as interest differentials over foreign rates narrow.  
  - Need for large-scale investment and financing to allow energy sector and infrastructure growth to keep pace with economic development.  
  - Ambitious fiscal and monetary targets could be harder to attain if government land sales are further delayed or if large foreign exchange inflows trigger a stronger-than-expected surge in imports.  
- Policy responses: strengthening monetary policy framework; comprehensive review of the energy sector; caution in granting offshore licenses until regulatory environment meets international standards; AML/CFT assessment mission planned for second quarter of 2007.

### Program monitoring, conditionality, and corrective actions
- Assessment criteria and reporting: net domestic borrowing, NDA of BCV, ceilings on nonconcessional external debt, NIR of BCV, and nonaccumulation of domestic and external arrears are formal assessment criteria with detailed reporting frequencies and deadlines.  
- Missed criteria corrective actions: delayed privatization and land-sale proceeds expected in 2007; arrears-prevention procedures agreed during first review being implemented; staff recommends waivers for the two missed December 2006 assessment criteria given corrective measures.  
- Proposed review schedule (2007–09):  
  - August 2007: third review discussions against end-June 2007 assessment criteria; Board review end-October 2007  
  - February 2008: fourth review discussions against end-December 2007 assessment criteria; Board review end-April 2008  
  - August 2008: fifth review discussions against end-June 2008 assessment criteria; Board review end-October 2008  
  - February 2009: sixth review discussions against end-December 2008 assessment criteria; Board review end-April 2009

*Source — Executive Summary, _cr07223 (IMF staff document).*

### Executive Summary ......................................................................................................

### _cr07223 - Executive Summary

### Executive summary — main findings
- Economic and policy performance described as strong; program objectives focused on reducing macroeconomic risks, increasing foreign reserves, and lowering public debt.  
- Growth: 2006 GDP growth estimate revised up from 5.8 percent to 6.5 percent.  
- Unemployment: fell to 18.3 percent in 2006, down 6.1 percentage points from 2005.  
- Reserve accumulation: reached 3.0 months of prospective imports at end-2006—above the program target.  
- Public debt: net domestic debt-to-GDP ratio reduced from 33.5 percent at end-2005 to 28.7 percent at end-2006 (close to initial program target).  
- Two quantitative assessment criteria missed:  
  - Net domestic borrowing ceiling exceeded by 0.8 percent of GDP (due to delayed land sale and privatization proceeds and lower-than-expected profit transfers from public enterprises).  
  - Some further accumulation of domestic arrears in late 2006 while new arrears-prevention procedures were implemented.  
- Staff recommendation: grant waivers because firm corrective actions are being taken and the increases are expected to be unwound in 2007.

### Recent developments and macro performance
- Monetary and external: BCV sterilization and credit growth drained excess liquidity; large inflows of official assistance, tourism exports, and FDI. Net inflows of remittances and emigrant deposits continued despite narrowing spreads.  
- Emigrant deposits: average emigrant time deposit rate at end-2006 was 4.4 percent, 1.5 percent above the euro area rate.  
- Credit growth: largest share went to highly collateralized real estate lending and a domestic bank’s purchase of a Portuguese bank claim of €71 million on Electra (bought for a present value of €38 million and since restructured; part securitized for local stock market).  
- Fiscal: tax revenues higher than projected; recurrent public spending restrained; record-high execution rate of the public investment program. Unexpected late-2006 domestic borrowing rise will be unwound in 2007 as delayed revenues arrive.  
- Domestic arrears: stock being cleared faster than targeted; Ministry of Finance implementing monitoring, strengthened budget execution for central government entities, procedures to make payments on behalf of entities incurring arrears and deduct amounts from transfers. Municipalities signed MOUs to pay electricity bills on time; planned tax on consumer electricity bills to meet public lighting costs. Nevertheless, hospitals incurred arrears to state pharmaceutical company in Nov–Dec 2006, and some Electra arrears remained at end-2006.

### Structural reforms and institutional measures
- Progress reported on: improving budget management and audit processes; preventing public sector arrears; reforming tax laws and administration; strengthening regulatory frameworks for energy and financial sectors.  
- Specific measures:  
  - Automatic adjustment mechanism for electricity and water tariffs published in January 2007 and being applied.  
  - Draft public employment law to be submitted to the National Assembly to provide legal basis for new salary plans and career/mobility rules.  
  - Large Taxpayers Unit established in the Ministry of Finance, to be fully operational by mid-2007.  
  - New law concerning the Court of Auditors (TdC) submitted to the National Assembly; Inspectorate General of Finance reinforced with additional staff and brought within a new organic law.  
  - Public sale initiated of most remaining government shares in Enacol through the Cape Verde Stock Exchange—the biggest financial operation ever in Cape Verde.

### Macroeconomic framework and projections (from program discussions)
- Growth projection: 2007 projection revised up to 6.9 percent reflecting significant FDI pipeline; medium-term growth expected to average above 7 percent, driven primarily by FDI-led expansion of the tourism industry.  
- Inflation: 12-month rate expected to return to low single digits during 2007 as fresh food prices decline toward trend levels; current private credit growth expected to have limited impact on inflation.  
- International reserves: retained target of increasing reserves by at least another 0.1 month of prospective imports in 2007.  
- Domestic debt repayment: repayment target for 2007 raised by CVEsc 800 million to unwind higher-than-expected borrowing in 2006; domestic-debt-to-GDP ratio expected to decline to 22.5 percent by year-end.

### Monetary policy actions and prospects
- BCV liquidity management: since December 2006, BCV aims to fully sterilize liquidity impact of reserve accumulation by issuing 14-day and 6-month central bank bills.  
- Policy-rate efforts: BCV offering 14-day bills at a fixed interest rate set at a margin below the Euribor rate to create an official policy rate and reduce incentives for commercial banks to place excess liquidity abroad.  
- Reserve requirement: lowered from 15 to 14 percent in late March 2007. BCV intends, if necessary, to fully sterilize liquidity increases and is exploring a formal operating framework based on closer monitoring and targeting of external interest rate differentials.  
- Banks: excess liquidity has eased due to sterilization and rapid private credit growth; banks face both withdrawal requests from emigrants and increased domestic competition for deposits; increased private sector access to international capital and offshore institutions has exacerbated interest rate pressures and market distortions tied to high reserve requirements.

### Risks, uncertainties, and policy responses
- Key risks identified:  
  - Possible withdrawal of emigrant deposits as interest rate differentials over foreign rates narrow.  
  - Need for large-scale investment and financing to allow energy sector and infrastructure growth to keep pace with economic development.  
  - Ambitious fiscal and monetary targets could be harder to attain if government land sales are further delayed or if large foreign exchange inflows trigger a stronger-than-expected surge in imports.  
- Policy responses under implementation: strengthening the monetary policy framework and conducting a comprehensive review of the energy sector.

### Program monitoring and corrective actions
- Two missed quantitative assessment criteria were addressed with firm corrective measures. Delayed privatization and land-sale proceeds now expected in 2007; arrears-prevention procedures agreed during the first review are being implemented. Staff recommends waivers for the missed criteria given corrective actions.

_Italic: Source — Executive Summary, _cr07223 (IMF staff document)._

### 13.      In the LOI the government commits to improving public sector financial

### _cr07223 - 13.      In the LOI the government commits to improving public sector financial

### Public sector financial management — commitments and actions
- Commitments submitted or to be submitted to the National Assembly:
  - Legislation to support streamlining of tax exemptions.
  - A revised General Tax Code.
  - A new Code on Judicial Processes.
  - Bills on individual and corporate income taxes.
- Timing and implementation:
  - Tax exemption reforms delayed from end-June to end-December 2007, but government remains determined to implement measures to rationalize exemptions in coordination with other tax reform initiatives.
- Institutional reforms and systems improvements:
  - Reform the structure and functions of the Tax Directorate in the Ministry of Finance.
  - Set up a new customs audit court and modernize the Inspectorate General of Finance.
  - Improve budget management by:
    - Better forecasting revenue and financing flows.
    - Broadening coverage of the medium-term expenditure framework.
    - Expanding the online, real-time system (SIGOF) for budget execution and monitoring.
- Arrears prevention:
  - Prevent arrears by fully implementing the measures agreed in 2006 (see ¶7). Indications from the authorities are that these measures are now taking hold.
- Technical assistance:
  - LEG is providing technical assistance on tax legislation.
  - Authorities have requested further technical assistance from FAD to help formulate criteria for granting tax exemptions.

### Financial sector — regulation and offshore center
- Regulatory strengthening under way by the BCV:
  - A consultant has completed a report assessing the legal and institutional framework.
  - After stakeholder discussions, BCV expects to finalize legislative proposals by December 2007.
- Supervisory cooperation:
  - Discussions well advanced on information-sharing agreements with home country supervisors of institutions operating in Cape Verde, although formal agreements have not yet been signed.
- AML/CFT and licensing caution:
  - An AML/CFT assessment mission from the IMF is planned for the second quarter of 2007.
  - Staff reiterated the need for caution in granting offshore licenses until the regulatory environment is consistent with international standards to safeguard Cape Verde’s good reputation.

### Public investment and financing — medium-term planning and borrowing
- Recommendation and authorities’ agreement:
  - Prepare a comprehensive medium-term investment plan, including for state-owned enterprises.
- Objectives of the plan:
  - Support prioritization of public investment.
  - Support planning needed to secure concessional external financing.
  - Help identify the possible financing gap to be met by fiscal measures or, if debt sustainability considerations allow, through less-concessional government and government-guaranteed external borrowing.
  - Enable the program ceiling on external nonconcessional borrowing to be set on a more systematic basis.
- Usage note:
  - The ceiling was only partially used in 2006, for infrastructure projects; for 2007, nonconcessional loan guarantees may be used for port, airport, and electricity sector development.

### Automatic price adjustment mechanisms — energy sector regulation
- Regulatory improvements:
  - Automatic adjustment mechanism for electricity and water tariffs now in place.
  - ARE expects to finalize a mechanism for setting base tariffs by mid-2007.
  - ARE intends to apply the current adjustment mechanism for retail petroleum prices soon after each incoming shipment of petroleum products, as originally envisaged.
- Staff emphasis:
  - Automatic and transparent updates of utility tariffs and petroleum prices would:
    - Depoliticize price setting.
    - Safeguard the budget.
    - Give companies incentives for investment and efficiency gains.
- Government action:
  - Government has embarked on a comprehensive review of the structure, operation, and regulation of the energy sector.

### Program monitoring and staff appraisal — performance and priorities
- Program monitoring:
  - Assessment criteria, benchmarks, and indicative targets for the next two reviews are in Tables A1 and A2 of the LOI. The review schedule is in Table 8.
- Staff appraisal — key findings:
  - Cape Verde displays commendable economic and policy performance.
  - Growth estimates and projections have been revised upward; inflation and unemployment are falling; and the program objective of reducing macroeconomic risks is being met.
  - Progress is being made in reducing public debt, building up official foreign exchange reserves, improving fiscal and monetary management, and strengthening energy and financial sector regulation.
- Fiscal and monetary outlook:
  - Reserve accumulation in 2006 substantially exceeded the target and the domestic debt-to-GDP ratio has been substantially reduced.
  - Though borrowing in 2006 was higher than expected, this increase is set to be unwound in 2007 and domestic debt at year-end is likely to be significantly lower than originally targeted.
- Arrears and institutional implementation:
  - Government is making progress in clearing arrears and preventing further arrears.
  - Procedures agreed during the first program review for stopping arrears accumulation need to be firmly implemented, including among semi-autonomous public entities.
- Priorities and recommendations:
  - Implement automatic and transparent adjustment of utility tariffs and petroleum prices to depoliticize price-setting, safeguard the government budget, and provide incentives for investment and efficiency gains.
  - Prepare and use a comprehensive medium-term investment plan for government and state-owned enterprises to prioritize investment, identify concessional financing, and set external nonconcessional borrowing ceilings systematically, subject to debt sustainability constraints; support this approach by further strengthening debt management and accounting, backed by technical assistance.
  - Move rapidly to strengthen regulation of the financial sector, especially the offshore center, to cope with reputational risks and challenges from rapid financial development and increased interaction between the offshore center and the domestic economy.
  - Exercise caution in granting offshore licenses until these regulatory reforms are implemented.

*Source: _cr07223 - 13. In the LOI the government commits to improving public sector financial (PDF chapter/section).*

### 24.      Staff recommends completion of the second program review. Based on the

### Staff recommends completion of the second program review. Based on the

### Recommendation
- Staff recommends completion of the second program review.
- Staff supports granting waivers for the two December 2006 assessment criteria—on domestic borrowing and arrears accumulation—that were missed.

### Macroeconomic outlook (Selected Economic and Financial Indicators, 2005–09)
- Real GDP: 5.8; 5.5; 6.5; 6.9; 7.5; 7.8
- Real GDP per capita: 3.8; 3.5; 4.5; 4.9; 5.5; 5.7
- Consumer price index (annual average): 0.4; 6.2; 5.4; 2.5; 1.8; 1.9
- Consumer price index (end of period): 1.7; 5.5; 6.2; 0.2; 2.2; 1.8
- Exports of goods and services: 23.9; 8.9; 29.6; 19.5; 16.4; 16.0
- Imports of goods and services: 0.5; 14.6; 23.1; 21.6; 17.3; 13.8
- Terms of trade (minus = deterioration): -5.6; -0.5; -6.3; 3.0; 2.0; 2.7
- Total revenue (excluding grants): 11.3; 17.3; 19.6; 18.3; 10.9; 10.7
- Total expenditure: 10.1; 27.8; 7.7; 16.6; 7.9; 8.6
- Gross capital formation: 37.3; 38.7; 39.2; 44.4; 49.3; 52.9
- Gross national savings: 33.9; 31.8; 32.8; 32.1; 32.7; 36.3
- External current account (including official current transfers): -3.4; -6.9; -6.4; -12.2; -16.6; -16.7
- Total nominal government debt: 86.6; 80.8; 72.4; 63.5; 58.7; 53.5
- External government debt: 53.1; 52.4; 43.7; 41.0; 39.2; 36.7
- Gross international reserves (millions of euros, end of period): 147.4; 166.4; 193.1; 234.2; 275.1; 325.4
- Gross international reserves (months of prospective imports of goods and services): 2.8; 3.1; 3.0; 3.1; 3.2; 3.3
- External debt service (percent of exports of goods and services): 8.6; 8.2; 5.9; 5.1; 5.7; 5.8
- Nominal GDP (billions of Cape Verde escudos): 88.7; 98.1; 101.6; 116.0; 128.6; 143.0
- Exchange rate (Cape Verde escudos per U.S. dollar) period average: 88.7; ...; 87.8; .........
- Exchange rate end period: 93.5; ...; 83.5; .........

### Fiscal operations (Central Government, 2005–09; millions of Cape Verde escudos and percent of GDP)
- Revenue, grants, and net lending (levels): 26,779; 33,437; 31,044; 35,295; 36,964; 39,950; 44,459
- Domestic revenue (incl. net lending): 21,123; 24,604; 25,255; 26,963; 29,871; 33,138; 36,699
- Tax revenue: 18,601; 21,099; 22,828; 24,178; 26,599; 29,524; 32,764
  - Income and profit taxes: 5,822; 6,955; 6,952; 7,497; 8,109; 9,096; 10,255
  - Consumption taxes: 7,390; 8,351; 9,821; 10,140; 11,285; 12,579; 14,060
  - International trade taxes: 4,231; 4,501; 4,889; 5,458; 5,839; 6,307; 6,889
- Nontax revenue: 2,375; 3,505; 2,017; 2,585; 3,021; 3,413; 3,784
- External grants: 5,657; 8,833; 5,789; 8,332; 7,093; 6,812; 7,760
- Total expenditure (levels): 32,437; 40,413; 34,924; 39,943; 40,712; 43,933; 47,698
  - Recurrent expenditure: 18,948; 22,416; 18,908; 22,575; 23,904; 25,079; 27,583
  - Capital expenditure: 11,073; 16,290; 12,338; 16,340; 15,102; 15,065; 16,089
    - Foreign financed: 9,204; 12,534; 11,096; 13,487; 12,249; 11,626; 11,841
    - Domestically financed: 1,869; 3,755; 1,242; 2,853; 2,853; 3,439; 4,248
- Overall balance, including grants (budget basis): -5,657; -6,976; -3,880; -4,648; -3,748; -3,983; -3,239
- Financing:
  - Foreign (net): 2,785; 3,414; 3,130; 3,043; 3,043; 3,084; 2,340
  - Domestic financing (net): 713; 3,575; 1,759; 1,605; 706; 900; 900
  - Net domestic borrowing: 713; 830; 301; 639; -602; -1,402; 300; 300
- Memorandum items:
  - Overall balance, including grants (excluding clearance of arrears and net late payments): -4,258; -4,324; -1,529; -3,620; -2,073; -2,676; -1,932
  - Arrears clearance (part of despesa extraordinária and other): 1,430; 1,708; 2,012; 1,028; 1,028; 1,307; 1,307
  - Domestic borrowing, excluding for clearance of arrears and net late payments: -686; -1,821; -712; -1,630; -3,077; -1,007; -1,007
  - Primary balance (including grants): -3,728; -5,154; -1,960; -2,765; -1,865; -1,941; -1,074
  - Domestic debt (including arrears and accounts payable, net of deposits): 29,723; 27,902; 29,134; 25,426; 26,057; 25,050; 24,043

### Fiscal operations (percent of GDP highlights)
- Revenue, grants, and net lending: 30.2; 34.1; 30.4; 30.4; 31.9; 31.1; 31.1
- Domestic revenue (incl. net lending): 23.8; 25.1; 24.7; 23.3; 25.8; 25.8; 25.7
- Total expenditure: 36.6; 41.2; 34.4; 34.4; 35.1; 34.2; 33.4
- Overall balance, including grants (budget basis): -6.4; -7.1; -3.9; -4.0; -3.2; -3.1; -2.3
- Primary balance (including grants): -4.2; -5.3; -1.9; -2.4; -1.6; -1.5; -0.8
- Domestic debt (including arrears and accounts payable, net of deposits): 33.5; 28.4; 28.7; 22.5; 22.5; 19.5; 16.8

### Balance of payments (2005–09; millions of Cape Verde escudos and percent of GDP)
- Current account balance (including official transfers): -3,016; -6,725; -6,463; -14,194; -21,382; -23,833
  - Trade balance: -30,960; -37,178; -41,717; -54,041; -65,238; -75,416
    - Exports, f.o.b.: 7,891; 8,862; 7,366; 6,783; 7,256; 7,584
    - Imports, f.o.b.: -38,851; -46,040; -49,082; -60,824; -72,495; -83,000
  - Services (net): 6,148; 5,782; 13,327; 18,658; 23,256; 28,919
    - Services credit: 24,667; 25,513; 34,842; 43,652; 51,433; 60,469
      - Of which: tourism: 10,466; 10,327; 18,377; 25,143; 31,843; 39,488
    - Services debit: -18,519; -19,731; -21,515; -24,994; -28,177; -31,550
  - Income (net): -2,984; -2,905; -3,943; -4,870; -5,646; -6,168
    - Credit: 1,641; 2,167; 1,627; 2,094; 2,377; 2,633
    - Debit: -4,625; -5,073; -5,570; -6,964; -8,024; -8,800
  - Current transfers (net): 24,780; 27,577; 25,869; 26,059; 26,246; 28,832
    - Government: 4,090; 7,404; 4,310; 4,269; 3,260; 3,604
    - Other: 20,690; 20,173; 21,559; 21,789; 22,986; 25,228
- Capital and financial account (net): 7,031; 8,900; 12,249; 18,778; 25,846; 29,423
  - Capital transfers: 1,821; 1,420; 2,383; 2,826; 3,552; 4,157
    - Government: 1,831; 1,420; 2,383; 2,826; 3,552; 4,157
      - Of which: MCA: 665; 333; 659; 1,250; 1,804; 2,213
  - Direct investment (net): 6,696; 2,110; 10,710; 15,587; 18,121; 21,008
  - Government net official flows: 2,080; 3,431; 2,266; 3,090; 3,084; 2,340
    - Disbursements: 4,314; 5,531; 4,240; 5,156; 5,726; 5,457
    - Amortization: -2,234; -2,101; -1,974; -2,066; -2,642; -3,116
- Overall balance: 5,000; 2,175; 5,274; 4,584; 4,463; 5,589
- Gross international reserves (levels, memorandum): 16,260; 18,356; 21,304; 25,830; 30,345; 35,894
  - Months of current year's imports of goods and services: 3.4; 3.3; 3.6; 3.6; 3.6; 3.8
  - Months of next year's import of goods and services: 2.8; 3.1; 3.0; 3.1; 3.2; 3.3
- External public debt (memorandum): 47,099; 51,456; 44,414; 47,504; 50,478; 52,565
- External aid (grants and loans; percent of GDP): 11.5; 14.6; 10.8; 10.6; 9.7; 9.2

### Monetary and banking aggregates (2005–09)
- Monetary survey (Broad money M2 levels): 72,644; 82,511; 85,536; 99,335; 111,152; 124,710
  - Narrow money (M1): 28,719; 32,620; 35,860; 41,645; 46,599; 52,283
  - Quasimoney: 40,566; 46,076; 45,505; 52,846; 59,132; 66,345
  - Foreign currency deposits: 3,359; 3,815; 4,172; 4,844; 5,421; 6,082
- Net foreign assets (dec. levels): 21,889; 26,056; 25,137; 33,573; 38,712; 44,369
- Net domestic assets (dec. levels): 50,755; 56,456; 60,398; 65,763; 72,441; 80,341
- Net domestic credit (dec. levels): 60,193; 65,127; 70,487; 75,895; 82,615; 90,559
  - Credit to the economy: 34,496; 39,273; 44,855; 51,736; 58,868; 66,606
  - Credit to private sector: 34,040; 38,751; 44,205; 51,042; 58,150; 65,854
- Income velocity of money: 1.31; 1.27; 1.28; 1.25; 1.22; 1.21
- Credit to the economy (percentage change): 9.0; 13.8; 30.0; 15.3; 13.8; 13.1
- Emigrant deposits (levels): 28,318; 31,339; 31,293; 36,342; 40,665; 45,625
- Excess reserves / total deposits (percent): 2.1; 0.8; 1.3; 1.0; 0.9; 0.9
- Money multiplier (M2/M0): 3.44; 3.69; 3.92; 4.25; 4.29; 4.32
- Reserve money (M0, levels): 21,136; 22,368; 21,845; 23,393; 25,903; 28,844
  - Reserve money (12-month change in percent): 14.3; 5.8; 3.4; 7.1; 10.7; 11.4
- Bank of Cape Verde net international reserves (millions of euros): 137.0; 156.0; 183.3; 224.4; 266.0; 317.4
- Gross international reserves (millions of euros): 147.4; 166.4; 193.1; 234.2; 275.1; 325.4

### Deposit-money banks (selected)
- Deposit liabilities to nonbank residents: 65,009; 74,047; 77,802; 90,795; 101,939; 114,643
  - Local currency deposits: 61,650; 70,232; 73,631; 85,950; 96,518; 108,561
    - Demand deposits: 21,084; 24,156; 28,126; 33,104; 37,386; 42,215
    - Time deposits: 38,390; 43,605; 43,334; 50,326; 56,312; 63,181
  - Foreign currency deposits: 3,359; 3,815; 4,172; 4,844; 5,421; 6,082
- Credit to the economy (deposit-money banks): 33,333; 38,110; 43,708; 50,435; 57,432; 65,015
  - Credit to private sector: 32,945; 37,656; 43,114; 49,797; 56,769; 64,319
- Net foreign assets (dec. levels for commercial banks): 6,581; 8,652; 4,747; 8,642; 9,202; 9,185

### External financing and reserves dynamics
- Overall balance of payments (annual): 5.6; 2.2; 5.2; 4.0; 3.5; 3.9
- Gross international reserves (euros end period): 147.4; 166.4; 193.1; 234.2; 275.1; 325.4
- Gross international reserves (months of prospective imports): 2.8; 3.1; 3.0; 3.1; 3.2; 3.3

### Proposed work program 2007–09 (timing of reviews)
- August 2007: Discussions on the third review against end-June 2007 assessment criteria; Board review end-October 2007
- February 2008: Discussions on the fourth review against end-December 2007 assessment criteria; Board review end-April 2008
- August 2008: Discussions on the fifth review against end-June 2008 assessment criteria; Board review end-October 2008
- February 2009: Discussions on the sixth review against end-December 2008 assessment criteria; Board review end-April 2009

*Sources: Cape Verdean authorities, Ministry of Finance and Public Administration, Bank of Cape Verde, and IMF staff estimates and projections.*

### 1.      Cape Verde’s three-year Policy Support Instrument (PSI), approved by the IMF

### Cape Verde’s three-year Policy Support Instrument (PSI), approved by the IMF

### Program objectives
- Support the government’s economic objectives and policy framework for 2006-09 through a three-year PSI approved by the IMF Executive Board in July 2006.
- Main program focuses:
  - Consolidate macroeconomic stability, notably by reducing public debt and increasing official foreign exchange reserves.
  - Improve public sector financial management: strengthen macroeconomic coordination and planning, stop arrears, broaden the tax base, and improve internal and external audit processes.
  - Reduce fiscal risks, including those that could arise from operations of state-owned enterprises.
  - Strengthen regulation and supervision of the financial sector, particularly the growing offshore financial center.

### Growth and inflation outlook
- GDP growth:
  - 2006 growth estimate revised up to 6.5 percent.
  - 2007 growth projected at around 6.9 percent, reflecting expected further increases in foreign direct investment inflows.
- Inflation:
  - “Headline” inflation rose in late-2006 following a court ruling on VAT application; 2007 Budget Law largely restored the pre-existing price structure.
  - Expectation that twelve-month inflation will return to low single-digit rates during 2007, aided by continued trend declines in fresh food items.

### Macroeconomic policies and 2006 outturn
- Fiscal outcomes in 2006:
  - Higher-than-projected tax revenues; firm restraint on recurrent public spending.
  - Record-high execution rate of the public investment program, reaching over 80 percent.
  - Domestic borrowing increased unexpectedly near year-end due mainly to delayed proceeds from land sales and privatization and lower-than-anticipated profit transfers from public enterprises.
  - The program ceiling on net domestic borrowing was exceeded; the government requests a waiver for missing this assessment criterion and proposes corrective actions in 2007.
  - Corrective measures: use delayed proceeds arriving in 2007 to unwind higher-than-expected 2006 borrowing; strengthen monitoring and forecasting of revenues and financing flows; propose changes in the 2007 budget to the National Assembly if necessary.
- Monetary policy:
  - Policy remains consistent with building foreign exchange reserves and supporting the exchange rate peg.
  - Reserves reached 3.0 months of prospective imports at end-2006.
  - Bank of Cape Verde (BCV) aims in 2007 to increase reserves by at least a further 0.1 months of imports.
  - BCV notes that excess liquidity may have eased due to rapid private sector credit growth and sterilization of foreign exchange inflows; BCV will monitor liquidity and adjust policy operations as appropriate and explore improvements to its operating framework, including closer monitoring of external interest differentials.

### Structural reforms and fiscal governance
- Tax policy and administration:
  - Finalize draft legislation to streamline tax incentives and exemptions; submit to the National Assembly by end-December 2007 (timing slightly delayed from original plan).
  - During the second half of 2007 submit the revised General Tax Code (CGT), the new Code on Judicial Processes (CPJ), and draft bills covering individual and corporate income taxes (IRC and IRS) to the National Assembly.
  - Large Tax Payers Unit established and to be fully operational by end-June 2007.
  - Strengthen DGCI structure, functioning, and management; reform strategy to be finalized by December 2007 and reforms aimed to be completed by end-2008.
- Audits and arrears:
  - New law concerning the Court of Auditors (TdC) approved by the Council of Ministers and submitted to the National Assembly; an additional judge appointed.
  - New customs audit court to be set up; Tax Inspectorate to be strengthened and modernized.
  - Inspectorate General of Finance reinforced; quarterly accounts produced through SIGOF will improve monitoring of budget execution.
  - Measures to prevent accumulation of payment arrears by central government, semi-autonomous agencies, and municipalities; Treasury procedure to pay Electra directly and deduct transfers from agencies if arrears continue.
  - Further arrears accumulated in late-2006 while new procedures were implemented; government requests a waiver for not meeting the assessment criterion on non-accumulation of arrears, citing corrective measures.
  - Municipalities signed a memorandum of understanding accepting responsibilities to Electra; government aims to ensure full compliance.
  - Introduction of a tax on consumer electricity bills to meet public lighting costs, including a margin for clearing accumulated payment arrears.
- Budget processes and MTEF:
  - Expand sectoral coverage of the medium-term expenditure framework (MTEF) and use it to support preparation of the 2008 state budget.
  - Increase coverage and use of the SIGOF system for controlling budget execution and monitoring outturns.
- Civil service reform:
  - Draft Civil Service Framework Law to be sent to the National Assembly by mid-year and expected to come into force in 2008.
  - Key objectives include increased mobility between public and private sectors, lower retirement costs via changes including increasing retirement age and length of service, introducing paid internships for young graduates, and provisions for unlimited leaves of absence.
  - New decrees in 2008 to revise Posts, Career Paths and Salary Scale, restructure technical career streams, devise a professional development tool, introduce a new salary scale, and introduce a new performance assessment system.

### Energy and utility tariff policy
- Regulatory measures:
  - Automatic adjustment mechanism for electricity and water tariffs approved and published in January 2007.
  - By May 2007, the Economic Regulatory Agency (ARE) expects to finalize and publish the mechanism for establishing base tariffs; this goal included as a mid-2007 assessment criterion.
  - ARE intends to apply the adjustment mechanism for retail fuel prices rapidly once oil companies submit shipment cost data.
  - From mid-2007, the program will include continuous assessment criteria to support full and systematic implementation of electricity, water, and fuel tariff mechanisms.

### Financial sector regulation and offshore center
- BCV actions:
  - Action plan to strengthen regulatory environment for the financial sector, with particular attention to the offshore banking center and associated reputational risks.
  - Consultant’s report assessing legal and institutional framework completed; BCV will prepare specific legislative proposals after stakeholder discussions and expects to complete these steps by December 2007.
  - An AML/CFT assessment mission from the IMF planned for the second quarter of 2007.
  - BCV pursuing training, familiarization, and other capacity building exercises.

### Program monitoring, conditionality, and benchmarks
- Government commitments:
  - Government will keep the IMF regularly updated on economic and policy developments and provide data needed for program monitoring, including twice-yearly reviews.
  - Cape Verde will consult with the IMF on adoption of any appropriate measures during the PSI period or whenever the IMF Managing Director requests consultation.
- Assessment criteria and requests for waivers:
  - Government requests waivers for missing the assessment criteria on net domestic borrowing and on non-accumulation of arrears for 2006, citing corrective measures to be implemented in 2007.
- Selected quantitative and timetable items highlighted in the program documents:
  - Public investment program execution reached over 80 percent in 2006.
  - Large Tax Payers Unit to be fully operational by end-June 2007.
  - Finalize and publish mechanism for setting base utility tariffs by end-June 2007 (supplementary measure).
  - Fully apply mechanisms for setting and adjusting electricity, water, and fuel prices on a continuous basis as of July 1, 2007.
  - Finalize reform strategy for DGCI by end-December 2007; submit revised income tax code, Code on Judicial Processes, and draft individual and corporate income tax bills to the National Assembly by end-December 2007.
- Supporting documents attached to the Letter of Intent:
  - Table A1: Quantitative Assessment Criteria and Benchmarks.
  - Table A2: Structural Assessment Criteria and Benchmarks.
  - Technical Memorandum of Understanding.

*Letter of Intent from Cristina Duarte, Minister of Finance and Public Administration.*

### 1.      This memorandum sets out the understandings between the Cape Verdean authorities

### This memorandum sets out the understandings between the Cape Verdean authorities and the IMF staff regarding the definition of assessment criteria and indicative targets and reporting requirements under the first annual program supported by the Policy Support Instrument

### I. Quantitative assessment criteria and indicative targets — overview
- Net domestic borrowing, net domestic assets (NDA) of the BCV, ceilings on nonconcessional external debt, net international reserves (NIR) of the BCV, and nonaccumulation of new domestic and external payments arrears constitute assessment criteria.
- Reporting frequencies and maximum delays:
  - Quarterly budget implementation data: submitted not later than five weeks after the end of each quarter.
  - Preliminary monthly BCV and consolidated commercial bank balance sheets: monthly, maximum delay five weeks; definitive BCV monthly balance sheet when available.
  - Details of new external debt (including guarantees): quarterly, within five weeks of the end of each quarter.
  - NIR table by BCV: weekly basis, maximum delay two weeks.
  - Quarterly table of stock of domestic payments arrears: within four weeks after the end of the quarter.
  - Data on debt-service payments and external arrears accumulation/payments: quarterly, within five weeks of the end of each quarter; immediate notification to Fund staff of any accumulation of external arrears.
  - Exports/imports (volume and prices) and preliminary quarterly balance of payments: quarterly, within five weeks after the end of the quarter.

### A. Net domestic borrowing excluding for clearance of arrears and net late payments
- Definition and coverage:
  - "Net domestic borrowing excluding for clearance of arrears and net late payments" = cumulative change since start of calendar year of net credit to central government from banking and nonbanking sectors less (1) cumulative clearance during the calendar year of the stock of arrears as of end of the previous year and (2) cumulative payments during the first three months of the calendar year of expenses authorized by the previous year’s budget, and plus expenses accrued during the current year that will be paid during the first three months of the next calendar year as provisioned in the budget law (late payments or atrasados).
  - Ceiling 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 central government:
  - Defined as overall position of main central government institutions vis-à-vis banking and nonbanking system: stock of outstanding claims (loans, advances), other government debt instruments (such as long-term government securities) held by BCV, commercial banks, and nonbank institutions, less all deposits held by central government with BCV and commercial banks.
  - INPS is not included in central government accounts.
  - Excludes claims on the Trust Fund (TCMFs).
- Reporting requirements (quarterly; five-week deadline) — required items include:
  - (i) government domestic revenue by category;
  - (ii) external budget support grants;
  - (iii) government expenditure (primary current, domestic and external interest payments, capital expenditure — domestically and budget support financed capital expenditure and estimates of externally project financed capital expenditure);
  - (iv) gross payment and gross accumulation of domestic accounts payable (atrasados);
  - (v) gross payment and gross accumulation of domestic payments arrears;
  - (vi) external loan receipts and principal payments;
  - (vii) external arrears payments and accumulation;
  - (viii) bank and nonbank financing;
  - (ix) privatization and land sale receipts;
  - (x) any other revenue, expenditure, or financing not included above.
- Privatization and land proceeds definition:
  - All monies received by government from sale or concessioning of a public company, organization, or facility to private entities, as well as proceeds from sale of government land and liquidation of a public company, less restructuring costs.

### B. Net Domestic Assets (NDA) of the Central Bank (BCV)
- Ceiling:
  - Ceiling on cumulative change, from beginning of calendar-year 2006, in NDA of the BCV constitutes an assessment criterion.
  - NDA = 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 the central bank, as well as cash in circulation.
  - Program ceilings for NDA 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; adjusters valued at current exchange rates.
- Reporting:
  - Preliminary monthly balance sheets of BCV and consolidated commercial banks: monthly, maximum delay five weeks; definitive BCV monthly balance sheet when available.

### C. Ceiling on nonconcessional external debt contracted or guaranteed by the central government
- Scope and definitions:
  - Ceilings on medium- and long-term (quarterly) and short-term (continuous) nonconcessional external debt are assessment criteria.
  - "Nonconcessional external debt" = debt contracted or guaranteed by central government with grant element of less than 35 percent, calculated using currency-specific CIRRs published by the OECD DAC.
  - Debt rescheduling and debt reorganization are excluded from the limits.
  - Limits on new nonconcessional external debt contracted or guaranteed by central government (excluding borrowing from the Fund) specified in Table A1 of the Letter of Intent.
  - Definition of short-term nonconcessional external debt excludes normal short-term (less than one year) import-related financing.
  - Portuguese government's precautionary credit line in support of exchange rate peg excluded from definition of nonconcessional external debt.
  - Assessment criterion on medium- and long-term nonconcessional external indebtedness applies to debt defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), 8/24/00) and also to commitments contracted or guaranteed for which value has not been received.
  - For short-term nonconcessional external indebtedness, "debt" has the meaning set forth in point No. 9 of the Guidelines (Decision No. 12274-(00/85), 8/24/00).
- Reporting:
  - Government will consult Fund staff when uncertain whether an instrument falls under the assessment criterion.
  - Details of all new external debt (including guarantees), indicating terms and creditors, provided quarterly within five weeks after end of quarter.

### D. Net International Reserves (NIR) of the BCV
- Floor:
  - Floor on cumulative change, from beginning of calendar-year 2006, in NIR constitutes an assessment criterion.
  - NIR = gross international reserves of BCV net of its external reserve liabilities, calculated at current exchange rates.
  - Gross reserves defined as readily available, controlled by BCV, and held for balance of payments needs and FX intervention; include gold, SDRs, reserve position at IMF, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities.
  - BCV external liabilities comprise liabilities to nonresidents with original maturity < one year, any net off-balance-sheet positions (futures, forwards, swaps, options) with residents and nonresidents, any arrears on principal and 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; adjusters valued at current exchange rates.
- Reporting:
  - NIR table prepared by BCV transmitted weekly, maximum delay two weeks.

### E. Nonaccumulation of new domestic payments arrears
- Commitment:
  - Government will not accumulate any new domestic payments arrears.
  - Monitoring through monthly execution of cash-flow plan and release of budget appropriations.
- Arrears definition for programming:
  - Domestic payment obligation to suppliers deemed in arrears if not paid within normal grace period of 60 days (30 days for government salaries and debt service) or such other period specified by budget law or contractually agreed after verified delivery, unless amount or timing is subject to good faith negotiations.
- Reporting:
  - Ministry of Finance and Public Administration (through D.G.T.) to submit quarterly detailed table of stock of domestic payments arrears, including accumulation, payment, rescheduling, and write-off during quarter, within four weeks after quarter end.

### F. Nonaccumulation of external payments arrears
- Commitment:
  - Government will not accumulate any new external payments arrears on a continuous basis.
  - Monitored through monthly execution of cash-flow plan and release of budget appropriations.
- External arrears definition:
  - Total external debt-service obligations of government not paid by due date, except where creditor agreements provide for a grace period after obligations fall due.
  - External arrears exclude arrears on external debt pending conclusion of debt-rescheduling agreements.
- Reporting:
  - Data on (i) debt-service payments; and (ii) external arrears accumulation and payments transmitted quarterly by Ministry of Finance and Public Administration within five weeks of quarter end; immediate notification to Fund staff of any accumulation of external arrears.

### II. Structural assessment criteria
- A. Finalize and publish mechanism for setting base utility tariffs — completion conditions:
  - (i) Technical specifications agreed between Electra and ARE (Economic Regulatory Authority);
  - (ii) Details of base tariff setting mechanism published;
  - (iii) Base tariff levels brought in line with agreed mechanism.
- B. Continuous application of mechanisms for setting and adjusting electricity, water, and fuel prices — completion conditions:
  - (i) Base utility tariffs are set and reset with the periodicity specified in agreed base tariff setting mechanism;
  - (ii) Between resetting of base tariffs, utility tariffs are adjusted whenever input costs since last adjustment have changed cumulatively by more than three percent as specified in the published utility tariff adjustment mechanism;
  - (iii) Within one month of each import shipment of petroleum products, retail petroleum product prices are adjusted and brought in line with the specifications in the retail petroleum price adjustment mechanism.

### III. Other data requirements for program-monitoring purposes
- Exports and imports data (volume and prices) compiled by Director of Customs and the BCV: transmitted quarterly within five weeks after the end of each quarter.
- Preliminary quarterly balance of payments compiled by BCV: forwarded within five weeks after the end of each quarter.

### IMF Press Release and Executive Board summary (May 8, 2007)
- PSI background:
  - PSI approved on July 31, 2006 (Press Release No. 06/172).
  - PSI intended to help reduce macroeconomic risks, provide margin for safety against shocks, and prepare for possible longer-term decline in access to concessional external financing.
  - Key measures: reducing public debt, building up international reserves, improving public financial management, strengthening financial sector and energy sector regulation.
- Executive Board observations (Mr. Murilo Portugal):
  - Growth estimates for 2006 and 2007 revised up.
  - Inflation declining and "expected to return to low single-digit levels by the end of this year."
  - Fiscal and monetary policies on track to meet or surpass PSI objectives, notably reduction in domestic debt as share of GDP and build-up of official foreign exchange reserves.
  - Emphasis on reforms: public sector financial management (budget implementation, audit processes, tax code streamlining and tax exemptions), ending public sector payment arrears, development of medium-term public investment plan including state-owned enterprises.
  - Need to strengthen financial sector regulation and supervision, including offshore sector and AML/CFT provisions.
  - Automatic adjustment mechanism for utility tariffs implemented earlier in 2007; mechanism to determine base tariff levels should be applied by mid-2007; retail fuel price adjustments should be automatic and transparent.

### Statement by Laurean W. Rutayisire, Executive Director for Cape Verde (May 7, 2007) — recent developments and performance under the program
- Overall assessment:
  - Authorities consented to publication of letter of intent and staff report.
  - PSI implementation contributing to increased resilience, lower risks, diminishing public sector liabilities, and increasing foreign reserves.
  - Actual macroeconomic performance on several fronts exceeded PSI targets: growth, reserve accumulation, revenue mobilization, reduction of domestic debt in percent of GDP.
- Recent developments and performance:
  - 2006 growth: "about 6.5 percent."
  - Consumer inflation: after late-2006 upsurge due to court-ordered VAT application change, inflation has been declining.
  - Fiscal 2006 performance:
    - Fiscal deficit preliminary estimate: "about 3.8 percent" (well below program target).
    - Higher-than-projected tax revenues due to strengthened tax administration.
    - A large taxpayers unit established at Ministry of Finance, expected to be fully operational by mid-2007.
    - Control exercised over recurrent public spending and public investment.
    - Progress in clearing domestic arrears; domestic debt-to-GDP ratio markedly reduced.
  - Missed assessment criteria:
    - (1) Accumulation by semi-autonomous government entities of arrears to Electra. Government response: will make direct payments to Electra if these entities accumulate new arrears and deduct amounts paid from government transfers allocated to them.
    - (2) Domestic borrowing exceeded program ceiling due to delays in mobilization of proceeds from land sales and privatization and lower-than-anticipated profit transfers from public enterprises. Authorities plan to use delayed proceeds to clear additional domestic debt when available and improve monitoring/forecasting of revenues and financing flows, seeking IMF technical assistance.
  - Authorities request waivers for the two missed assessment criteria in light of remedial measures taken.

*Source: IMF memorandum and related IMF documents provided in the content unit.*

### 5.      On the monetary front, emphasis has been put by the monetary authorities on

### _cr07223 - 5.      On the monetary front, emphasis has been put by the monetary authorities on

### Program for 2007 — Growth, inflation, reserves, and debt
- Growth in 2007 is projected to be around 6.9 percent, mainly driven by foreign direct investment.
- Fiscal deficit is expected to be in the neighborhood of 3 percent, supported by tight control over public spending and ongoing efforts to boost revenues.
- Average consumer inflation is projected to be low in 2007 as fresh food prices continue to trend downward.
- Authorities are determined to make further progress in reducing domestic debt, which, in percent of GDP, is expected to be significantly below its initial target for end-2007.

### Monetary policy stance and operations
- Emphasis on increasing foreign reserves in support of the exchange rate peg with the euro.
- The Bank of Cape Verde (BCV) has been actively managing liquidity by issuing its own bills.
- The BCV is continuing to explore a formal operating framework based on closer monitoring and targeting of interest rate differentials between on-shore and off-shore banks as well as between the euro area.
- The BCV is seeking continued technical assistance from the Fund in support of ongoing strengthening of monetary policy operations, particularly in supervision of financial institutions and liquidity management.
- The BCV expects the level of reserves at end-2007 to be slightly higher compared with that of end-2006 which covered three months of prospective imports.
- The BCV will aim to sterilize liquidity by issuing its own bills; combined with significant growth in private sector credit, this should keep easing excess liquidity in the banking system.

### Fiscal policy and reform measures
- Authorities remain committed to fiscal discipline and sound budgetary processes.
- Steps to strengthen tax administration and reduce fiscal risks, especially those emanating from the energy sector.
- Preparation of a revised General Tax Code and a Code on Judicial Processes to be submitted to the National Assembly during the second half of 2007.
- Authorities welcome IMF technical assistance, particularly in developing criteria for granting tax exemptions.
- Work underway to expand the coverage of the medium-term expenditure framework, with completion hoped for by end-June 2007.
- Authorities see merit in developing a comprehensive medium-term investment plan to support prioritization of public investment and management of debt and contingent liabilities, but face capacity limitations in debt management, accounting, and debt sustainability analysis and would welcome Fund technical assistance in these areas.

### Financial sector reform and offshore center vulnerabilities
- BCV will continue building reserves in line with monetary program objectives and to support the exchange rate regime.
- Steps to devise an action plan for improving the financial sector’s regulatory framework, particularly to address vulnerabilities related to the offshore center.
- Assessment of the legal and institutional framework has been completed and key stakeholders consulted; BCV is hopeful specific legislative proposals will be finalized by December 2007.
- Strengthening the regulatory framework aims to ensure commercial banks continue to receive sustained and large remittance inflows from Cape Verdian emigrants.
- Authorities are aware of risks of reversal flows of emigrant deposits as the spread between the emigrant deposit rate and the euro area rate narrows and will closely monitor interest rate differentials and stand ready to take action as appropriate.
- Further analysis of factors determining remittance flows in a Selected Issues paper is recommended to shed light on the actual risk of withdrawal of emigrant deposits.
- An AML/CFT assessment mission by the IMF is expected to be conducted in Cape Verde in the second quarter of 2007 to complement efforts to address vulnerabilities in the financial sector.

### Other structural and institutional reforms
- Progress in strengthening external and internal audit processes: a draft law relating to the Court of Auditors has been submitted to the National Assembly after approval by the Council of Ministers.
- Increased number of judges and staff assigned to the Court of Auditors and the financial audit department; additional steps planned to strengthen the tax audit department.
- An automatic adjustment mechanism for water and electricity tariffs was put in place following the June 2006 decision to eliminate subsidies to Electra; application of this mechanism will help reduce fiscal risks.
- Authorities intend to finalize and publish by end-June 2007 the mechanism for setting base utility tariffs.
- Continued civil service reforms aimed at enhancing mobility between private and public sectors, reducing retirement costs borne by the government, and increasing employment opportunities for job seekers.

### Conclusion and requests
- The authorities have taken corrective actions and display commendable economic and policy performance.
- Request for Directors’ support for waivers for the two missed assessment criteria on non-accumulation of arrears and domestic borrowing and for completion of the second program review.

*Source: _cr07223 - 5.      On the monetary front, emphasis has been put by the monetary authorities on*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07223.pdf_