## CAPE VERDE — Third Review Under the Policy Support Instrument (_cr0837) ## Source details **Canonical URL:** [CAPE VERDE — Third Review Under the Policy Support Instrument (_cr0837)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0837.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0837.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0837.pdf.json) --- ### Executive summary and program decision - Staff recommends completion of the third review under the Policy Support Instrument (PSI) and recommends waivers for the nonobservance of two structural assessment criteria based on remedial measures taken by the authorities. - Key outcomes to date: - All quantitative assessment criteria for end-June 2007 were met comfortably. - Fiscal consolidation and the build-up of official reserves have proceeded faster than program expectations; initial projections for both domestic debt and official reserves for 2009 are likely to be reached in 2008. - Performance on structural reforms has been mixed: the new mechanism for setting base utility tariffs was not implemented and the mechanisms for adjusting utility and fuel prices were not applied; on the basis of remedial measures staff recommends granting waivers for the two missed structural assessment criteria. ### Macroeconomic performance and outlook - Growth and labor market: - Real GDP growth for 2006 of nearly 11 percent (noted also as 10 ¾ percent in INE data). - Growth projections: 2007 projected around 7 percent; 2008 forecast about 7 ¾ percent; robust growth of 7 to 8 percent expected to continue in the near and medium term. - Unemployment nearly 20 percent but fell by 6 percentage points in 2006. - Inflation: - Consumer prices increased by 5 percent in the 12 months to October 2007. - Staff projection: 5¾ percent by December 2007 (5 percent annual average) and to fall thereafter to 2-3 percent; inflation expected to return to about 2 percent in 2008. - External sector and reserves: - Reserves at end-September reached 3¾ months of prospective imports and 130 percent of base money. - Gross international reserves (millions of euros, end of period) series: 147.4; 193.1; 267.7; 320.3; 376.9; 425.4 (Table 1 highlights). - Current account deficit increased driven by FDI-related imports; financed by tourism-related FDI and other financial flows. ### Fiscal policy, budget stance, and debt dynamics - 2008 budget and program stance: - 2008 budget presented to Parliament on October 20th; supported by staff as based on conservative revenue forecasts and measured expenditure growth. - Recurrent spending contained to free resources for capital expenditures; budget allows for no utility and energy subsidies. - No additional net domestic borrowing by the budget in 2008; net domestic borrowing ceiling set on a net basis. - Debt and reserves implications: - Net domestic debt-to-GDP ratio projected to decline to below 20 percent by end-2008, one year ahead of the PSI schedule. - Domestic debt reduction running ahead of program schedule. - Joint World Bank–IMF debt sustainability analysis: most important risk to debt distress would arise from a return to imprudent fiscal policy. - Fiscal aggregates (selected, preserve reported values): - Total revenue (excluding grants) as percent of GDP: 11.3, 19.6, 10.1, 12.5, 12.0, 12.2 (2005–10). - Total expenditure as percent of GDP: 10.1, 11.7, 7.6, 12.9, 9.2, 10.5 (2005–10). - Overall balance, including grants (percent of GDP): -7.1; -5.0; -4.0; 0.1; -3.0; -4.2; -3.0; -2.4 (selected table entries). - Central government fiscal magnitudes (millions of Cape Verde escudos, selected): Revenue, grants, and net lending lines include 33,437; 31,044; 35,295; 15,269; 35,576; 38,551; 43,693; 49,200. ### Monetary policy, exchange rate, and financial sector reform - Exchange rate regime and monetary management: - De facto and de jure exchange rate arrangement: conventional peg fixed to the euro; pegged at CVEsc 110.3 per EUR 1 since January 4, 1999. - BCV manages liquidity and interest differentials with the euro area through sterilization and open market operations; issues 14-day and 6-month central bank bills (14-day bill is BCV policy rate). - Real effective exchange rate (REER) broadly in line with fundamentals; REER fluctuated within a 5 percent band around a constant trend but appreciated in the last eighteen months. - Emigrant deposits and monetary risks: - Large emigrant deposits account for "40 percent of total bank deposits". - Emigrant deposit series (millions): 28,318; 31,339; 31,293; 35,457; 40,388; 45,436; 50,953. - Emigrant deposit growth "slowed markedly in the first half of 2007"; banks offer a "25-basis-point" interest premium on some emigrant deposits; staff recommends careful management of external interest differentials to guard against outflows. - Financial sector reform and supervision: - Rapid strengthening of regulation and supervision urged to avoid reputational risks from misuse of the international financial center and potential third-party-enforcement actions. - Measures in the MEFP include establishing a financial intelligence unit and strengthening AML/CFT framework; BCV requested an early FSAP for Cape Verde. - Staff notes recommendations of the task force on financial sector reform were only partially met. ### Public financial management (PFM), statistics, and structural reforms - PFM and statistics weaknesses and actions: - Long-standing weaknesses: repeated arrears accumulation, excess domestic borrowing, large statistical discrepancies, weaknesses in fiscal data reporting. - SIGOF (Integrated Online Budget Management) expansion planned; formal mid-year review of fiscal developments to be introduced. - Statistical master plan estimated resources required over 2006–10: US$15 million. - Energy sector reforms and fiscal risk: - Failure to fully and continuously apply utility and petroleum pricing mechanisms represents fiscal risks. - "2006 accrued subsidies amounted to more than 2 percent of GDP"; part paid in 2006, rest cleared in 2007. - Retail gasoline and diesel prices increased by "15 and 11 percent respectively on October 24" to clear fiscal liabilities. - Policy measures include: automatic and transparent updates of utility tariffs and petroleum prices; performance contracts with Electra management; secure financing for Electra’s investment program; encourage private-sector generation (experience on Sal); creation of a joint logistics company for petroleum; a new simplified fuel adjustment mechanism; improve Electra’s management and expand generation and transmission capacity, including wind power. - Note: "There should be no impact on the budget from the temporary delay in adjusting utility tariffs through end-December 2007, and thereafter, utility prices would reflect market prices (para. 21 of the MEFP)." ### Risks, uncertainties, and staff recommendations - Risks and uncertainties: - Need for more flexible factor and product markets to enhance adjustment capacity to shocks. - Recent decline in the flow of emigrant deposits poses challenges for monetary management. - Large-scale investment required in energy and infrastructure to keep pace with development. - Staff recommendations and priorities: - Consolidate macroeconomic stability to support reserves buildup and reduce vulnerabilities to shocks, including expected decline in concessional external financing as graduation from LDC status approaches. - Continue improving public sector financial management to enhance budget execution and monitoring. - Accelerate comprehensive energy sector reform to reduce fiscal risk and attract investment. - Further develop and strengthen the financial sector to safeguard stability and support liberalization of financial flows. - Maintain policies that preserve debt sustainability; consider modest tax reforms and scale up capital spending once debt targets are achieved and medium-term investment priorities are finalized. ### Program monitoring, benchmarks, and reporting requirements - Structural assessment criteria and benchmarks (selected): - Finalize and publish the mechanism for setting base utility tariffs: Timing End-June 2007 (Status: Not met); proposed new timing End-March 2008 (assessment criterion for fourth review). - Fully apply mechanisms for setting and adjusting electricity, water, and fuel prices: Timing Continuous as of July 1, 2007 (Status: Not met). - Large taxpayers unit fully operational: Timing End-June 2007 (Status: Met). - Reporting deadlines and operational specifications (selected): - Ministry of Finance to provide budget implementation data quarterly, not later than five weeks after quarter end. - Preliminary monthly BCV and consolidated commercial banks balance sheets transmitted monthly with maximum delay of five weeks. - NIR table from BCV transmitted weekly with maximum delay of two weeks. - Detailed stock of domestic payments arrears to be provided quarterly within four weeks after quarter end. - Net domestic borrowing and NDA definitions and adjusters are specified in the TMU with precise adjuster rules linked to external debt service, nonproject external assistance, and land-sale proceeds. ### Key macroeconomic projections and indicators (Table highlights — preserve reported series) - Real GDP (annual percent change, 2005–10): 6.5, 10.8, 6.9, 7.7, 7.4, 7.4. - Real GDP per capita (2005–10): 4.6, 8.8, 5.0, 5.7, 5.4, 5.3. - Consumer price index (annual average, 2005–10): 0.4, 5.4, 4.9, 4.0, 1.7, 2.0. - Credit to the economy (annual percent change, 2005–10): 9.0, 17.3, 27.1, 13.8, 13.2, 13.2. - Broad money (M2) growth (2005–10): 15.5, 17.7, 13.3, 13.9, 12.5, 12.1. - Gross capital formation (2005–10): 36.7, 37.8, 43.2, 47.6, 52.4, 56.9. - External current account (including official current transfers, percent of GDP, 2005–10): -3.4, -5.1, -9.5, -11.5, -12.6, -14.7. - Gross international reserves (months of prospective imports, 2005–10): 2.8, 3.1, 3.6, 3.7, 3.8, 3.9. - Balance of payments (selected, millions of escudos): Current account balance (including official transfers): -3,016; -5,259; -10,965; -14,978; -18,292; -23,686 (2005–10). ### Debt sustainability analysis (DSA) and scaling-up scenarios - DSA conclusion: risk of debt distress is low under the baseline and remains low under stress and scaling-up scenarios, conditional on continued fiscal prudence and sustained tourism exports and FDI. - Central government debt dynamics (selected baseline figures, percent of GDP): central government debt series include 88.9; 87.1; 77.3; 66.4; 59.6; 54.3; 50.1; 47.4; 45.8; 42.5; 36.6. - Scaling-up borrowing scenario (2008–12): - Assumes US$ 35 million borrowed on commercial terms in each year 2008-12 (described as "equivalent to 2 percent of GDP on average during 2008-12"). - Additional borrowing used to scale up public capital expenditure; risk of debt distress remains low — "All ratios remain well below the thresholds throughout the forecast horizon." - Stress tests and alternative scenarios: - Historical fiscal slippage (endogenous risk scenario A1) leads to sharply rising debt; primary threat to debt sustainability is a return to historical fiscal deficits. - Extreme exogenous shock (B2): temporary widening of primary deficit to 11 percent of GDP during 2008-09 increases ratios temporarily but preserves low risk of distress. ### Proposed PSI work program and timelines - 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. *Source: IMF staff report — Cape Verde: Third Review Under the Policy Support Instrument. Approved by David Andrews and Mark Plant, November 29, 2007.* ### 2007. The views expressed in the staff report are those of the staff team and do not ### CAPE VERDE — Third Review Under the Policy Support Instrument ### Executive summary and program decision - Staff recommends completion of the third review under the Policy Support Instrument (PSI) and recommends waivers for the nonobservance of two structural assessment criteria based on remedial measures taken by the authorities. - Key outcomes to date: - All quantitative assessment criteria for end-June 2007 were met comfortably. - Fiscal consolidation and the build-up of official reserves have proceeded faster than program expectations; initial projections for both domestic debt and official reserves for 2009 are likely to be reached in 2008. - Performance on structural reforms has been mixed: the new mechanism for setting base utility tariffs was not implemented and the mechanisms for adjusting utility and fuel prices were not applied. ### Macroeconomic performance and outlook - Growth and labor market: - Real GDP growth for 2006 of nearly 11 percent. - Robust growth of 7 to 8 percent expected to continue in the near term and over the medium term, driven by tourism-related FDI, public infrastructure investment, and growth of financial services. - Unemployment remains high at nearly 20 percent but fell by 6 percentage points in 2006. - Inflation: - Consumer prices increased by 5 percent in the 12 months to October 2007. - Staff projection: 5¾ percent by December 2007 (5 percent annual average) and to fall thereafter to 2-3 percent, consistent with the peg and inflation in the euro area. - External sector and reserves: - Reserves at end-September reached 3¾ months of prospective imports and 130 percent of base money. - Current account deficit increased driven by FDI-related imports; financed by tourism-related FDI and other financial flows. ### Fiscal policy and debt dynamics - Program and 2008 budget stance: - The 2008 budget is supported by staff: based on conservative revenue forecasts and measured expenditure growth; budget presented to Parliament on October 20th. - Recurrent spending is contained to free resources for capital expenditures; the budget allows for no utility and energy subsidies. - Debt and reserves implications: - Domestic debt reduction is running ahead of program schedule; net domestic debt-to-GDP ratio is projected to decline to below 20 percent by end-2008, a year ahead of the PSI schedule. - Staff advice: beyond 2008 consider further fiscal consolidation to allow for further reserve buildup and reduce vulnerability to shocks. - Joint World Bank–IMF debt sustainability analysis shows the most important risk to debt distress would arise from a return to imprudent fiscal policy. - Authorities’ intentions: - Preserve debt sustainability as a fiscal cornerstone. - Intend to consider tax cuts once program debt target is achieved, such as reducing the corporate income tax rate from 30 to 25 percent. - Plan to use some fiscal space to scale up capital expenditure once medium-term investment program is finalized. ### Monetary policy, exchange rate, and financial sector reform - Exchange rate regime: - Cape Verde’s de facto and de jure exchange rate arrangement is a conventional peg fixed to the euro; the peg has served as an anchor for financial stability. - The real effective exchange rate (REER) is broadly in line with fundamentals; REER has fluctuated within a 5 percent band around a constant trend for several years but appreciated in the last eighteen months. - The recent significant appreciation of the euro against the US dollar warrants close monitoring. - Monetary management: - Within the peg framework, BCV manages liquidity and interest differentials with the euro area through sterilization and open market operations. - Private sector credit growth has been rapid; reduced credit to government has dampened broad money growth. - Banks drew down on net foreign assets to finance purchases of BCV bills and investments on the Stock Exchange, contributing to reserves accumulation. - Financial sector reform: - Staff notes progress is needed to safeguard financial stability and enhance growth prospects; recommendations of task force on financial sector reform were only partially met. ### Public financial management (PFM) and structural reforms - PFM: - Long-standing weaknesses in public sector financial management remain a concern despite progress in preventing central government arrears. - Progress is being made to improve budget execution and monitoring; three of four structural benchmarks for end-June 2007 were only partially met. - Energy sector: - Authorities committed to move more rapidly on comprehensive energy sector reform to improve utility and petroleum pricing mechanisms, encourage investment, reduce fiscal risk, and support growth. - Structural assessment criteria missed: - The new mechanism for setting base utility tariffs was not implemented. - The mechanisms for adjusting electricity, water, and fuel prices were not fully and continuously applied during most of 2007. - On the basis of remedial measures taken by the authorities, staff recommends granting waivers for the two missed structural assessment criteria. ### Risks, uncertainties, and policy recommendations - Risks and uncertainties: - Need for more flexible factor and product markets to enhance adjustment capacity to shocks. - Recent decline in the flow of emigrant deposits poses challenges for monetary management. - Large-scale investment required to enable energy sector and infrastructure growth to keep pace with economic development. - Staff recommendations and priorities: - Consolidate macroeconomic stability to support reserves buildup and reduce vulnerabilities to shocks, including the expected decline in concessional external financing. - Continue improving public sector financial management to enhance budget execution and monitoring. - Accelerate comprehensive energy sector reform to reduce fiscal risk and attract investment. - Maintain policies that preserve debt sustainability; consider modest tax reforms and a scaled increase in capital spending once debt targets are achieved and medium-term investment priorities are finalized. *Source: IMF staff report — Cape Verde: Third Review Under the Policy Support Instrument. Approved by David Andrews and Mark Plant, November 29, 2007.* ### 9. Monetary management remains fully consistent with the goal of building ### _cr0837 - 9. Monetary management remains fully consistent with the goal of building ### Monetary management and emigrant deposits - Large emigrant deposits account for "40 percent of total bank deposits". - Emigrant deposit growth "slowed markedly in the first half of 2007". - Staff recommendation: careful management of external interest differentials to guard against outflow of emigrant deposits. - Banks noted a substantial narrowing of the spread between emigrant and euro area deposit rates and are responding by launching savings products for emigrants with significantly higher rates. - The BCV has pushed up domestic interest rates in line with the rise in European rates and will continue to monitor other indicators of monetary conditions and adjust policy operations as appropriate. - Banks continue to offer a "25-basis-point" interest premium on some emigrant deposits for historical reasons, their size, and the additional foreign exchange business they bring. ### Financial sector regulation and supervision - Staff urged rapid strengthening of financial sector regulation and supervision to avoid: - significant reputational risks from abuse of Cape Verde’s international financial center, and - potential third-party-enforcement actions that could jeopardize growth and financial stability. - Strengthening the financial sector is an important requirement for the authorities’ planned liberalization of financial flows. - Measures committed in the MEFP include three new benchmarks to: - establish a financial intelligence unit, and - strengthen the anti-money-laundering and combating-of-financing-of-terrorism framework. - The BCV reiterated their request for an early FSAP for Cape Verde. - Staff view further liberalization of financial flows as largely validating the current de facto situation; removal of remaining restrictions would facilitate financing of residents’ participation in tourism projects and development of Cape Verde as an international financial center. - Current liberalization status noted: "FDI transactions, portfolio investments, and forward foreign exchange transactions are liberalized. External borrowing and foreign currency deposit accounts are formally subject to BCV regulations, which currently are nonrestrictive." ### Public financial management (PFM) reforms: budget execution and monitoring - Long-standing PFM weaknesses contributed to: - repeated accumulation of arrears, - excess domestic borrowing, - large statistical discrepancies in fiscal accounts, and - weaknesses in fiscal data reporting. - Staff recommended introducing a mid-year review of fiscal developments to compare half-year outcomes with budget forecasts and allow corrective actions. - Authorities report ongoing initiatives shaped by the Country Financial Accountability Assessment action plan and World Bank Public Expenditure Reviews; capacity constraints have slowed reform progress. - Authorities are seeking additional technical assistance, including from the Fund, to accelerate PFM reforms. - Measures in the MEFP include the Integrated Online Budget Management System to improve tools for budget execution and monitoring. - A formal mid-year review committed by the authorities should help enhance budget monitoring and allow corrective actions if necessary. ### Energy sector reforms: fiscal risk and growth implications - Staff reiterated that failure to fully and continuously apply utility and petroleum pricing mechanisms (missed structural assessment criteria) represents fiscal risks and could threaten growth and poverty reduction. - Utility and petroleum subsidies have been a serious budgetary drain: in "2006 accrued subsidies amounted to more than 2 percent of GDP". - Part of this was paid in 2006; the rest was cleared in 2007. - Retail gasoline and diesel prices were increased by "15 and 11 percent respectively on October 24", which should clear fiscal liabilities built up since the last price adjustment in early 2007. - Staff recommendation: keep tariffs in line with current costs to prevent Electra cash-flow problems and to encourage investment and efficiency. - Policy measures and government strategy: - automatic and transparent updates of utility tariffs and petroleum prices to depoliticize price setting, safeguard the budget, and incentivize investment and efficiency gains; - performance contracts with new Electra management to induce managerial efficiency; - secure financing for Electra’s investment program, including creation of a task force and addressing underutilization of non-concessional borrowing ceiling; - encourage private-sector cooperation (experience on the island of Sal) to generate electricity feeding Electra’s distribution grid; - creation of a new logistics company for joint import, storage, and distribution of petroleum to realize economies of scale; - introduce a new and simplified fuel adjustment mechanism to align domestic fuel prices with international prices; - improve Electra’s management and expand generation and transmission capacity, including wind power. - Staff acknowledged that these measures will take time before resulting in sizable cost savings. - Note: "There should be no impact on the budget from the temporary delay in adjusting utility tariffs through end-December 2007, and thereafter, utility prices would reflect market prices (para. 21 of the MEFP)." ### Program monitoring - Assessment criteria, benchmarks, and indicative targets for the next two reviews are in Tables 1 and 2 of the MEFP, including a proposed modification to the end-"December 2007" assessment criterion on net domestic borrowing set during the second review. - The ceiling has been lowered to reflect the government’s full unwinding of the higher than programmed domestic borrowing in "2006", and an adjuster has been added to safeguard against unexpected delays in proceeds from land sales (Appendix I, Attachment II, paragraph 2). - The review schedule is in Table 8. ### Staff appraisal: outlook and priorities - Cape Verde’s economic prospects continue to be favorable under the PSI program: - growth remains strong, - unemployment and poverty rates are falling, - inflation pressures remain contained, - all quantitative assessment criteria for end-"June 2007" were met comfortably. - The peg continues to serve Cape Verde well; staff believes the real exchange rate is broadly in line with fundamentals. - Authorities are commended for prudent macroeconomic management and should consolidate gains on macroeconomic stability. - Key priorities: - further development and strengthening of the financial sector to safeguard stability and support plans to further liberalize financial flows; - rapid execution of comprehensive energy sector overhaul plans to reduce fiscal risk and support growth and poverty reduction. *Source: _cr0837 - 9. Monetary management remains fully consistent with the goal of building (IMF staff report excerpt).* ### 22. Staff recommends completion of the third review of the PSI program. Based on ### _cr0837 - 22. Staff recommends completion of the third review of the PSI program. Based on ### Staff recommendation - Staff recommends completion of the third review of the PSI program. - Based on the strength of the authorities’ policies and the corrective measures taken, staff supports granting of waivers for the two structural assessment criteria that were missed. ### Key macroeconomic projections and indicators (Table 1 highlights) - Real GDP: 6.5, 10.8, 6.9, 7.7, 7.4, 7.4 (2005–10 annual percentage change as listed) - Real GDP per capita: 4.6, 8.8, 5.0, 5.7, 5.4, 5.3 - Consumer price index (annual average): 0.4, 5.4, 4.9, 4.0, 1.7, 2.0 - Exports of goods and services: 23.9, 35.0, 13.8, 18.8, 15.5, 13.5 - Tourism (component of exports): 17.8, 82.5, 37.5, 30.4, 22.8, 16.9 - Imports of goods and services: 0.5, 23.4, 18.1, 16.9, 16.4, 14.6 - Net foreign assets: 58.8, 14.8, 25.6, 20.6, 16.7, 12.4 - Credit to the economy (annual percent change): 9.0, 17.3, 27.1, 13.8, 13.2, 13.2 - Broad money (M2) growth: 15.5, 17.7, 13.3, 13.9, 12.5, 12.1 - Gross capital formation: 36.7, 37.8, 43.2, 47.6, 52.4, 56.9 - Gross national savings: 33.3, 32.7, 33.7, 36.1, 39.8, 42.3 - External current account (including official current transfers, percent of GDP): -3.4, -5.1, -9.5, -11.5, -12.6, -14.7 - Gross international reserves (millions of euros, end of period): 147.4, 193.1, 267.7, 320.3, 376.9, 425.4 - Gross international reserves (months of prospective imports of goods and services): 2.8, 3.1, 3.6, 3.7, 3.8, 3.9 ### Fiscal operations (Table 2 and Table 3 highlights) - Total revenue (excluding grants) as percent of GDP (Table 1): 11.3, 19.6, 10.1, 12.5, 12.0, 12.2 - Total expenditure as percent of GDP (Table 1): 10.1, 11.7, 7.6, 12.9, 9.2, 10.5 - Central government fiscal magnitudes (millions of Cape Verde escudos, Table 2): - Revenue, grants, and net lending (selected lines): 33,437; 31,044; 35,295; 15,269; 35,576; 38,551; 43,693; 49,200 (program/actual/budget/proj as shown) - Domestic revenue (incl. net lending): 24,604; 25,255; 26,963; 14,203; 27,812; 31,286; 35,039; 39,324 - Tax revenue: 21,099; 22,828; 24,178; 12,916; 25,454; 28,059; 32,140; 36,074 - Capital expenditure (millions): 16,290; 12,415; 16,340; 3,534; 13,438; 17,581; 18,441; 21,870 - Overall balance, including grants (budget basis): -6,976; -5,200; -4,648; 165; -3,414; -5,481; -4,381; -3,907 - Net domestic borrowing (selected): 830; 1,638; -602; -1,865; -1,201; -172; 797; -103 - Fiscal ratios (percent of GDP, Table 3): - Revenue, grants, and net lending: 34.1; 29.9; 30.6; 13.2; 30.8; 29.6; 30.0; 30.4 - Total expenditure: 41.2; 34.9; 34.6; 13.1; 33.8; 33.8; 33.1; 32.9 - Overall balance, including grants (percent of GDP): -7.1; -5.0; -4.0; 0.1; -3.0; -4.2; -3.0; -2.4 ### Balance of payments and external financing (Table 4 highlights) - Current account balance (including official transfers, millions of escudos): -3,016; -5,259; -10,965; -14,978; -18,292; -23,686 (2005–10 estimates/projections) - Trade balance (millions): -30,960; -40,654; -54,809; -65,429; -78,040; -90,926 - Services (net, millions): 6,148; 13,822; 21,244; 27,204; 32,991; 38,535 - Services credit (millions): 24,667; 35,523; 43,578; 52,672; 61,752; 70,798 - Of which tourism (millions): 10,466; 19,097; 26,249; 34,233; 42,044; 49,156 - Current transfers (net, millions): 24,780; 25,525; 25,750; 26,846; 30,961; 33,639 - Capital and financial account (net, millions): 7,031; 10,871; 19,178; 20,779; 24,537; 29,040 - Direct investment (net, millions): 6,696; 9,722; 10,164; 14,346; 17,158; 20,363 - Overall balance (percent of GDP): 5.6; 4.8; 7.1; 4.4; 4.3; 3.3 - Gross international reserves (millions of escudos, memorandum): 16,260; 21,304; 29,529; 35,331; 41,570; 46,917 ### Monetary and financial sector indicators (Tables 5–7 highlights) - Broad money (M2, millions of escudos): 72,643; 82,511; 85,536; 96,916; 110,396; 124,192; 139,271 - Narrow money (M1, millions): 28,718; 32,620; 35,860; 40,631; 46,282; 52,066; 58,387 - Reserve money (M0, millions): 21,136; 22,368; 21,845; 23,135; 26,375; 29,678; 33,278 - Credit to the economy: 34,496; 39,273; 44,855; 55,800; 63,527; 71,888; 81,351 - Emigrant deposits (millions): 28,318; 31,339; 31,293; 35,457; 40,388; 45,436; 50,953 - Gross international reserves (millions of euros, central bank table): 147.4; 166.4; 193.1; 267.7; 320.3; 376.9; 425.4 ### Proposed PSI work program (Table 8) - 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. ### Letter of Intent (high-level points) - Letter dated November 29, 2007 from the Minister of Finance and Public Administration to the IMF Managing Director. - Memorandum of Economic and Financial Policies reviews implementation of Cape Verde’s three-year PSI approved July 2006, with updates from January 2007 and May 2007. - The fourth and fifth PSI reviews are scheduled to be completed by end-April 2008 and end-October 2008, respectively. - Government commits to keep the IMF regularly updated, provide program-monitoring data, and consult with the IMF on adoption of potentially appropriate measures. - Government authorizes IMF publication of the letter, the attached MEFP, and the related staff report. /* Sources: Cape Verdean authorities, Ministry of Finance and Public Administration, Bank of Cape Verde, and IMF staff estimates and projections. */ ### 1. Cape Verde’s economic performance remains strong. The outlook for growth and ### Cape Verde’s economic performance remains strong. The outlook for growth and ### Summary of recent performance and challenges - Growth in 2006 reached 10 ¾ percent according to INE data. - Growth for 2007 is projected to be around 7 percent. - Consumer price inflation (annual average) is projected to reach about 5 percent for 2007, with inflation expected to return to a trend value of about 2 percent consistent with the peg in 2008. - Cape Verde is on the verge of graduation from UN least-developed-country (LDC) status in early 2008, which will reduce access to concessional financing and require preparation to become less dependent on aid. - Key structural progress: public sector management (fiscal accounting, budget execution and control, arrears prevention), strengthening of the financial sector, and improving energy sector regulation. ### Current economic setting — indicators and program performance - Rapid accumulation of international reserves, significantly exceeding the program target at end-June 2007. - Tourism and FDI flows are surging. - Domestic borrowing was significantly below its ceiling; the government has unwound the CVEsc 2.3 billion higher-than-targeted borrowing from 2006 and lowered the end-2007 domestic borrowing ceiling by the same amount. - Tax revenues, privatization receipts, and land sale receipts have already surpassed amounts budgeted for 2007. - Expenditures are evolving in line with budget ceilings; domestic debt is expected to decline to below 23 percent of GDP by end-2007. - No accumulation of central government payment arrears in 2007; significant reduction in municipal arrears (most municipalities current). - BCV advancing banking supervision reforms, AML/CFT legislation, and plans for a financial intelligence unit. - Government to introduce more transparent energy pricing to avoid contingent fiscal liabilities. ### Macroeconomic objectives and 2008 projections - Real GDP growth expected to be about 7¾ percent in 2008, driven by tourism investment, other services, and public infrastructure investment. - Inflation expected to return to about 2 percent in 2008. - Gross reserves targeted to increase by 0.1 month of imports. - Specific program objectives for remainder of 2007 and for 2008 referenced in Table 1 (attached in source). ### Fiscal policy (2008 budget and debt strategy) - Continued fiscal consolidation is central; aim to further reduce the domestic debt-to-GDP ratio. - Budget based on prudent revenue and expenditure projections; tax revenues and the wage bill budgeted to grow by less than nominal GDP. - Goods and services budget sufficient for timely payment of recurrent bills (electricity, water, fuel). - Domestic borrowing ceiling will be on a net basis in 2008 (rather than gross); no additional net domestic borrowing by the budget in 2008. - Net domestic debt-to-GDP ratio projected to decline to below 20 percent by end-2008, one year ahead of the original PSI target. - Treasury will seek to clear arrears more rapidly if extraordinary revenues materialize. ### Monetary management - Monetary management consistent with build-up of foreign exchange reserves to support the exchange rate peg to the Euro. - BCV to actively manage liquidity and interest rate differentials with the Euro area. - Liquidity operations through issuance of 14-day and 6-month central bank bills; the interest rate on the 14-day bill is the BCV’s official policy rate. - BCV will continue close monitoring of liquidity, domestic interest rates, and credit growth and adjust policy operations as appropriate. ### Structural reform issues — public sector financial management - SIGOF (Integrated Online Budget Management) system monitoring spending commitments, payments, and accounts payable; expansion to include all semi-autonomous institutes and most municipalities by end of the year. - New procedures manual to be drafted with MCC funding to support decentralization of budget execution and implementation of a new budget framework law and chart of public accounts. - Earlier deadline for granting new spending commitments: November 30 (spending commitments after November 30 authorized only on an exceptional basis). - Formal mid-year review of fiscal developments to assess revenue, expenditure, and financing and take corrective actions if necessary. - New chart of government accounts (PNCP) approved by Parliament and to be implemented in 2008. - Preparation of a new treasury management system and development of a medium-term expenditure framework. - Tax framework updates: revised General Tax Code, new Code on Judicial Processes, Forced Tax Collection code, and bills covering individual and corporate income taxes (IRC and IRS) to be submitted to the National Assembly before end-December 2007. - Preparation of a unified law on tax benefits to revoke all tax benefits not specifically mentioned in the new law; a moratorium on granting new tax exemptions pending completion. - Strengthening DGCI: focus on major taxpayers, cross-checking taxpayer information with Ministry of Labor, Social Security Institute and Customs, more frequent audits with hiring of new tax inspectors, and implementation of the Forced Tax Collection Code once approved. - Measures to prevent public sector arrears: close monitoring, working with semi-autonomous agencies to strengthen budget execution and payment practices, and procedures to make payments on behalf of entities that incur arrears and deduct those amounts from transfers. - Municipalities agreed in principle to pay electricity bills on time; government preparing a tax on consumer electricity bills to meet costs of public lighting. - Strengthening external and internal audit: new draft law concerning the Court of Auditors (TdC) submitted to the National Assembly; new customs audit court established; Tax Inspectorate to be strengthened; budget framework law to create positions of financial controllers in 2008. - Civil service reforms: draft Civil Service Framework Law expected to be sent to the National Assembly and come into force in 2008. ### Structural reform issues — financial sector - BCV measures: - New bank regulations on capital ratios, provisioning and loan classification; credit risk assessment; and credit concentration approved and to be published. - New banking accounting rules based on international accounting standards to be implemented from 2008. - Strengthened bank licensing and supervision procedures with IMF technical assistance. - Finalizing information sharing agreements with home country supervisors of most current offshore financial institutions and seeking similar agreements with other countries. - Preparing to implement AML/CFT assessment recommendations in the first half of 2008 (new structural benchmark). - Legislation to set up a Financial Intelligence Unit to be presented to the National Assembly by end-March 2008 (structural benchmark). - Measures support a strategy of further opening the capital account; a revised decree law to further liberalize the capital account has been drafted for government approval. ### Energy sector reform - Comprehensive strategy to ensure the energy sector supports growth and does not generate fiscal risk, emphasizing: - Investment to increase capacity and efficiency: improvements in electricity generation and transmission, higher water production capacities, development of alternative energy sources. - Increased private sector participation in management and investment. - Formation of a joint logistics company for importation, storage and inter-island distribution of oil products. - Improvement in billing and collection practices, including use of pre-paid electricity meters and reduction in illegal connections. - Regulatory measures: - ARE administrative council at full strength; government determined to ensure domestic fuel prices adjusted in line with international prices. - Retail gasoline and diesel prices increased by 15 and 11 percent respectively on October 24 to clear contingent fiscal liabilities. - ARE directed to ensure regular fuel price adjustments so that no further fiscal liabilities accrue. - ARE intends to have a new price adjustment mechanism in place no later than end-March 2008, based on international benchmark prices and applied with minimal delay after each shipment of oil imports (publication and implementation of this mechanism will be a new structural benchmark under the PSI). - Tariff stance: - No adjustment in electricity and water tariffs required at present; a commission charged by oil companies on earlier fuel supplies to Electra should not have been charged. The balance owed to the Treasury will be drawn on to cover the difference between the (notional) revised fuel oil and the actual price Electra will be charged for the rest of 2007; thereafter the market price will be charged with consequent adjustments in electricity and water prices. *Source: IMF country report content provided in the supplied document.* ### 22. Implementation of the mechanism for setting base electricity tariffs is also ### _cr0837 - 22. Implementation of the mechanism for setting base electricity tariffs is also ### Implementation status and timing - Implementation of the mechanism for setting base electricity tariffs is planned for the first quarter of 2008. - The mechanism had originally been expected to be ready by June 2007, but was delayed by the need to confirm two new members of the ARE administrative council. - Implementation by March 2008 (which will be an assessment criterion for the fourth review under the PSI) will enable base electricity tariffs to begin to reflect the broader structural reform strategy that will improve efficiency in the energy sector. ### Structural assessment criteria and benchmarks (selected) - Reduce fiscal risks: - Fully implement the automatic utility tariff adjustment mechanism. Timing: End-March 2007. Status: Met. - Finalize and publish the mechanism for setting base utility tariffs. Timing: End-June 2007. Status: Not met. - Fully apply mechanisms for setting and adjusting electricity, water, and fuel prices. Timing: Continuous as of July 1, 2007. Status: Not met. - Proposed new measures (added in the third program review): - Finalize and publish the mechanism for setting base utility tariffs. Timing: End-March 2008. - Finalize and publish a revised mechanism for adjusting petroleum prices. Timing: End-March 2008. - Other selected benchmarks and timings: - Implement the MTEF. Timing: End-June 2007. Status: In progress. - Sign formal information-sharing agreements with home country supervisors of subsidiaries and branches operating in Cape Verde. Timing: End-December 2006. Status: In progress. - Large taxpayers unit to be fully operational. Timing: End-June 2007. Status: Met. - Implement recommendations of the task force on financial sector reform. Timing: End-June 2007. Status: In progress. - Implement laws to strengthen the Court of Auditors (TdC) and the National Chart of Public Accounts. Timing: End-June 2007. Status: In preparation. - Multiple tax code and tax administration submissions to National Assembly. Timing: End-December 2007. ### Key quantitative program features and reporting deadlines (selected) - Reporting frequency and timeliness: - Ministry of Finance and Public Administration to provide data on budget implementation on a quarterly basis, to be submitted not later than five weeks after the end of each quarter. - Preliminary monthly balance sheets of the BCV and the consolidated commercial banks to be transmitted on a monthly basis, with a maximum delay of five weeks. Definitive monthly BCV balance sheet to be provided as soon as available. - A table on the NIR prepared by the BCV will be transmitted on weekly basis, with a maximum delay of two weeks. - Detailed table of the stock of domestic payments arrears to be provided quarterly within four weeks after the end of the quarter. - Data on debt-service payments and external arrears accumulation and payments to be transmitted quarterly by the Ministry of Finance and Public Administration, within five weeks of the end of each quarter; government will inform Fund staff immediately of any accumulation of external arrears. - Net domestic borrowing (definition and adjusters): - Net domestic borrowing excluding for clearance of arrears and net late payments defined as cumulative change since start of calendar year of net credit to central government from banking and nonbanking sectors less (1) cumulative clearance during calendar year of stock of arrears as of end of previous year and (2) cumulative payments during first three months of calendar year of expenses authorized by previous year’s budget, plus expenses accrued during current year that will be paid during first three months of next calendar year as provisioned (late payments or atrasados). - The ceiling will be adjusted downward (upward) by the cumulative downward (upward) deviations in external debt service, and upward (downward) by the cumulative downward (upward) deviation in nonproject external financial assistance relative to program assumptions. - The end-2007 ceiling will be adjusted upward by the downward deviation in revenue from contracted land sales relative to program assumption, and the 2008 ceilings will correspondingly be adjusted downward by the downward deviation in revenue from contracted land sales in 2007 relative to the 2007 program assumption. - Net domestic assets (NDA) of the BCV: - NDA defined as reserve money minus net foreign assets of the BCV, evaluated at the current end-of-period exchange rates. - Program ceilings for NDA will be adjusted downward (upward) by the cumulative downward (upward) deviations in external debt service and upward (downward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. - Reserve money comprises bank reserves and deposits of the monetary institutions and private sector with the central bank, as well as cash in circulation. - Nonconcessional external debt: - Nonconcessional external debt defined as debt contracted or guaranteed by the central government with a grant element of less than 35 percent, calculated using currency-specific commercial interest reference rates (CIRRs) published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). - Ceilings on medium- and long-term, as well as on short-term, nonconcessional external debt constitute assessment criteria; the medium- and long-term ceiling is on a quarterly basis while the short-term ceiling is on a continuous basis. - Exclusions: debt rescheduling and debt reorganization; normal short-term (less than one year) import-related financing; Portuguese government’s precautionary credit line in support of the exchange rate peg. - Government will consult Fund staff before assuming any liabilities when uncertain whether the instrument falls under the assessment criterion. Details of all new external debt (including government guarantees) to be provided quarterly within five weeks of the end of each quarter. - Net international reserves (NIR) of the BCV: - NIR defined as gross international reserves of the BCV net of its external reserve liabilities, calculated at the current exchange rates. - Gross reserves include gold, holdings of SDRs, the reserve position at the IMF, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. - External liabilities of the BCV include liabilities to nonresidents with original maturity of less than a year, net off-balance-sheet positions, any arrears on principal and interest to external creditors and suppliers, and purchases from the IMF. - Program floors for the NIR will be adjusted upward (downward) by the cumulative downward (upward) deviations in external debt service and downward (upward) by the cumulative downward (upward) deviations in nonproject external financial assistance relative to program assumptions. - Nonaccumulation of arrears: - Government will not accumulate any new domestic payments arrears. A domestic payment obligation to suppliers is deemed to be in arrears if it has not been paid within the normal grace period of 60 days (30 days for government salaries and debt service) or such other period specified by the budget law or contractually agreed, unless the amount or timing is subject to good faith negotiations. - Government will not accumulate any new external payments arrears on a continuous basis; external arrears defined as total external debt-service obligations not paid by the time they are due except where agreements provide a grace period. External arrears exclude arrears pending the conclusion of debt-rescheduling agreements. ### Definitions and reporting items (selected list required for program monitoring) - Ministry of Finance and Public Administration quarterly reporting to include: - (i) government domestic revenue by category; - (ii) external budget support grants; - (iii) government expenditure, including primary current expenditure, domestic and external interest payments, and capital expenditure, including domestically and budget support financed capital expenditure and estimates of externally project financed capital expenditure; - (iv) the gross payment and gross accumulation of domestic accounts payable (atrasados); - (v) the 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 defined as all monies received by the government from the sale or concessioning of a public company, organization, or facility to a private entity, as well as proceeds from sale of government land and liquidation of a public company, less restructuring costs. *Source: Attachment II—Technical Memorandum of Understanding and Table 2: Structural Assessment Criteria and Benchmarks for 2007–08, as presented in the supplied content.* ### 17. The condition for finalizing and publishing the mechanism for setting base electricity ### 17. The condition for finalizing and publishing the mechanism for setting base electricity and water tariffs ### Conditions for finalizing and publishing the mechanism - The condition will be deemed complete when all of the following are met: - (i) the technical specifications have been agreed upon between Electra and the autonomous Economic Regulatory Authority (ARE); - (ii) the details of the base tariff setting mechanism have been published; and - (iii) base tariff levels are brought in line with the agreed mechanism. ### Continuous application of the mechanisms for setting and adjusting electricity, water, and fuel prices - The condition will be deemed met when all of the following are satisfied: - (i) base utility tariffs are set, and reset with the periodicity, as specified in the agreed base tariff setting mechanism; - (ii) between resetting of base tariffs, utility tariffs are adjusted whenever input costs since the 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. ### Key operational specifications - Cumulative input-cost change threshold for interim tariff adjustments: more than three percent. - Petroleum price adjustment timing: within one month of each import shipment of petroleum products. ### Policy intent - Ensure transparent technical agreement between utility operator (Electra) and ARE, publication of mechanism details, and alignment of tariff levels and periodic adjustments with published rules to maintain timely pass-through of input-cost and import-price changes. ### Final source attribution *Source: _cr0837 - 17. The condition for finalizing and publishing the mechanism for setting base electricity and water tariffs* ### III. OTHER DATA REQUIREMENTS FOR PROGRAM‑MONITORING PURPOSES - Quarterly data transmission requirements: - Data on exports and imports, including volume and prices and compiled by the Director of Customs and the BCV, will be transmitted on a quarterly basis within five weeks after the end of each quarter. - A preliminary quarterly balance of payments, compiled by the BCV, will be forwarded within five weeks after the end of each quarter. ### Operational timeline - Reporting lag: within five weeks after the end of each quarter for both trade datasets and preliminary quarterly balance of payments. *Source: _cr0837 - 17. The condition for finalizing and publishing the mechanism for setting base electricity and water tariffs* ### Relations with the Fund and Financial Arrangements (selected figures and facts) - At end-September 2007, outstanding PRGF loans amounted to SDR 8.6 million. - Membership status: Joined: November 20, 1978; Article VIII. - Quota and holdings (General Resources Account; SDR Million): - Quota 9.60 100.00 - Fund holdings of currency 9.59 99.93 - Reserve Position 0.02 0.17 - SDR Department (SDR Million): - Net cumulative allocation 0.62 100.00 - Holdings 0.02 3.95 - Outstanding Purchases and Loans (SDR Million; %Quota): - PRGF Arrangements 8.64 90.00 - Latest financial arrangements table (dates and amounts): - PRGF: Type Arrangement Date Apr 10, 2002; Date of Expiration Jul 31, 2005; Amount Approved (SDR Million) 8.64; Amount Drawn (SDR Million) 8.64 - Stand-By: Type Arrangement Date Feb 20, 1998; Date of Expiration Mar 15, 2000; Amount Approved (SDR Million) 2.50; Amount Drawn (SDR Million) 0.00 - Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) — Forthcoming: - 2007 Principal 0.12 - 2008 Principal 0.49 - 2009 Principal 0.98 - 2010 Principal 1.48 - 2011 Principal 1.73 - 2007 Charges/Interest 0.03 - 2008 Charges/Interest 0.06 - 2009 Charges/Interest 0.06 - 2010 Charges/Interest 0.05 - 2011 Charges/Interest 0.05 - 2007 Total 0.15 - 2008 Total 0.56 - 2009 Total 1.04 - 2010 Total 1.53 - 2011 Total 1.77 - Safeguards assessments: - The Bank of Cape Verde (BCV) is subject to a voluntary safeguards assessment with respect to the Policy Support Instrument (PSI) approved on July 31, 2006; assessment underway. - Previous safeguards assessment completed in December 2002 with respect to the PRGF arrangement approved on April 10, 2002; assessment concluded that substantial risks may have existed in financial reporting, internal audit mechanism, and system of internal controls. - Outstanding issues noted in external auditors’ audit opinion on the 2005 and 2006 financial statements, and the 2004 management letter. - Exchange Arrangements: - The de facto and de jure exchange rate arrangement of Cape Verde is a conventional fixed peg. - The Cape Verde escudo has been pegged to the euro at a rate of CVEsc 110.3 per EUR 1 since January 4, 1999. - Cape Verde accepted the obligations under Article VIII effective July 1, 2004. *Source: _cr0837 - 17. The condition for finalizing and publishing the mechanism for setting base electricity and water tariffs* ### Technical Assistance and World Bank Collaboration (high‑level highlights) - Technical assistance provided by the Fund since 1985 to BCV, Ministry of Finance, and National Institute of Statistics in numerous areas including: organization and methods, management of external debt, monetary and banking statistics, accounting, credit and foreign exchange operations, public debt management, separation of central bank functions, national accounts, balance of payments, government finance statistics, price statistics, and monetary statistics and reporting. - Selected recent TA missions and areas: - FAD: VAT move assistance (June 2004); tax administration review (October 2004); assessment of tax exemptions and incentives (September 2005). - STA: National accounts (November 2003; January–February 2006); balance of payments statistics (February 2004); government finance statistics (March 2004; April 2006; February–March 2007); price statistics (June 2004; May–June 2006; October 2007); monetary statistics and reporting (March 2007). - MCM: Accounting, financial sector regulation, monetary operations and liquidity management (April and May 2004); banking supervision, liquidity management, exchange regime and reserves management (November 2005; March–April 2006; June 2006; November 2006; July 2007). - LEG: Tax legislation missions (October 2006–November 2007); AML/CFT initial assessment (March 2007). - World Bank Group collaboration: - Areas of collaboration include fiscal operations and tax reform; public enterprise reform and privatization; public expenditure management; civil service and pension system reform; utility regulation and private sector development; debt sustainability analyses; human resource development; poverty reduction strategy; planned collaboration on a Financial Sector Assessment Program (FSAP) in 2008 at the Government’s request. *Source: _cr0837 - 17. The condition for finalizing and publishing the mechanism for setting base electricity and water tariffs* ### STATISTICS ISSUES — Findings and planned actions - Assessment of data quality and gaps: - The quality of economic and financial data is generally adequate for surveillance and program monitoring, although there is a need for substantial improvements in some areas. - Weaknesses in fiscal data hamper monitoring of some aspects of fiscal performance. Specific weaknesses include: - large statistical discrepancies; - non-compliance with best accounting practices; - shortcomings in institutional coverage and sectorization. - Other shortcomings of particular concern: - weaknesses in the national accounts; - lack of short-term activity indicators besides the confidence barometer; - gaps in tracking large external flows—notably FDI, emigrant deposits, and remittances. - Authorities’ action plan and resource needs: - A comprehensive master plan has been developed under the direction of the National Statistical Institute (INE) to upgrade the statistical system and broaden improvements across all areas of statistics. - The plan envisages data improvements in: - national accounts (annual and quarterly); - business statistics (including a new business census); - demographic and social statistics (including a household survey to update the poverty profile); - trade statistics (retail and international trade); - macroeconomic indicators; - labor market statistics and sectoral statistics; - regular update of the CPI basket (every half a decade). - Estimated resources required to implement the plan over 2006–10: US$15 million. - Cape Verde’s development partners have already committed a substantial part of the estimated US$15 million required. *Source: _cr0837 - 17. The condition for finalizing and publishing the mechanism for setting base electricity and water tariffs* ### 22. The country is a participant in the Fund’s General Data Dissemination System ### 22. The country is a participant in the Fund’s General Data Dissemination System ### GDDS participation and STA technical assistance - Participant in the Fund’s General Data Dissemination System (GDDS) since February 2004. - Benefited from STA technical assistance (STA TA) under the GDDS project for Lusophone Africa to assist government in implementing GDDS plans for improvement, notably adoption of the Government Finance Statistics Manual 2001 (GFSM 2001). - GFS mission visited in March 2004; follow-up missions in April 2006 and March 2007. - STA TA also provided in national accounts, consumer prices, monetary and financial statistics, and balance of payments statistics. - CPI-related STA TA missions: May–June, 2006; October 2006; October 2007 (preparing launch of new CPI in November 2007). ### Real sector — national accounts and CPI - Timeliness: - INE released production and expenditure based GDP data for 2002–03 in 2005. - INE provided production based GDP estimates for 2004–06 to the mission in October 2007. - Lag remains large compared to international standards. - Base year and methodology: - Base year for constant price estimates is outdated (previously 1980; overhaul to update from 1980 to 2002). - Overhaul includes adopting the 1993 SNA. - Capacity and source data issues: - Full implementation of 1993 SNA requires substantial improvement in source data collection programs; sufficient capacity currently lacking. - 2006 STA mission identified critical need to improve timeliness and accuracy of national accounts source data, particularly the business survey. - INE staff capacity overstretched—assessing and correcting individual source data entries, a task not typically undertaken by national accounts compilers. - A statistical masterplan is expected to address many challenges. - Consumer Price Index: - New CPI expected to be released in November 2007. - Current official CPI weights date to 1989. - New index will use new weights, updated commodity basket, and new compilation software. - INE worked with the National Statistics Institute of Portugal and received STA CPI missions in May–June 2006, October 2006, and October 2007. ### Government finance — GFS compilation and data quality - Upgrades and systems: - GFS compilation system being upgraded with TA under GDDS project for Lusophone Africa. - Most deposits previously held with commercial banks consolidated at the central bank. - SIGOF (Integrated Online Budget Management System) to be expanded to include all semi-autonomous institutes and most municipalities by end-2007. - New chart of government accounts (PNCP) to be implemented in 2008 adopting accrual accounting and double-entry principle. - Persistent quality concerns: - Fiscal accounts subject to large statistical discrepancies; flows and stocks inconsistent. - Recording of arrear accumulation and clearance operations not in line with best practices. - Significant delays in donor reporting of project-financing affect fiscal data accuracy. - Despite recent revision of external debt data, significant weaknesses affect preparation of debt sustainability analyses: - Multilateral debt statistics regularly differ from data received by creditors. - Debt service projections cannot be reconciled with the debt stock. ### Money and banking statistics - Overall quality: - Monetary and financial statistics quality deemed adequate in accuracy and timeliness. - Developments: - March 2007 statistics mission assisted BCV in finalizing standardized report forms (SRFs) for reporting monetary statistics to STA. - SRF-based monetary data published in the IFS Supplement since June 2007. - Data fully aligned with recommendations of the Monetary and Financial Statistics Manual. - Mission began developing an integrated monetary database for STA, AFR, and BCV needs. - Gaps: - Gaps remain in tracking the source and direction of changes in emigrant deposits, causing difficulties for gauging monetary policy stance appropriateness. ### Balance of payments statistics - Improvements with STA assistance: - Accuracy, periodicity, and timeliness of BOP statistics compiled by BCV have continued to improve. - Greater use of surveys and the International Transactions Reporting System implemented by BCV expanded data sources and coverage. - Compilation largely follows recommendations of the 5th edition of the Balance of Payments Manual. - Quarterly BOP data dissemination on BCV website has been regular. ### Data dissemination — Common Indicators Required for Surveillance (as of November 6, 2007) - Selected data and timing (Date of latest observation / Date received / Frequency of Data / Frequency of Reporting / Frequency of Publication): - Exchange Rates: 11/06/07 / 11/06/07 / D / D / D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Sept-07 / Oct-07 / M / M / M - Reserve/Base Money: Sept-07 / Oct-07 / M / M / M - Broad Money: Sept-07 / Oct-07 / M / M / M - Central Bank Balance Sheet: Sept-07 / Oct-07 / M / M / M - Consolidated Balance Sheet of the Banking System: Sept-07 / Oct-07 / M / M / M - Interest Rates: Sept-07 / Oct-07 / M / M / M - Consumer Price Index: Sept-07 / Oct-07 / M / M / M - Revenue, Expenditure, Balance and Composition of Financing — General Government: June-07 / Ago-07 / Q / Q / Q - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Jun-07 / Ago-07 / Q / Q / Q - Stocks of Central Government and Central Government-Guaranteed Debt: Jun-07 / Oct-07 / Q / Q / Q - External Current Account Balance: Sept-07 / Oct-07 / Q / Q / Q - Exports and Imports of Goods and Services: Sept-07 / Oct-07 / Q / Q / Q - GDP/GNP: 2006 / Oct-07 / A / A / A - Gross External Debt: Jun-07 / Oct-07 / Q / Q / Q - Frequency key: Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA). - Footnotes: - Reserve assets include reserve assets pledged or otherwise encumbered as well as net derivative positions. - Interest rates include both market-based and officially-determined rates. - Financing lines include foreign, domestic bank, and domestic nonbank financing. - General government definition includes central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - Debt stocks include currency and maturity composition. ### Debt sustainability assessment — summary of DSA and macro framework - Context: - Joint World Bank–IMF DSA updated the 2006 DSA at the inception of the IMF Policy Support Instrument (PSI). - Second DSA for Cape Verde applying the Fund-World Bank debt sustainability framework (DSF) for low income countries. - Based on 2006 debt estimates updated during the mission for the third review of the PSI in October 2007, assessment maintains that risk of debt distress remains low. - 2006 developments: - Total nominal central government debt fell to 77 percent of GDP in 2006, down from 87 percent in 2005. - Central government external debt reduced from 54 percent of GDP to 48 percent during 2006. - Central government domestic debt reduced from 33 percent of GDP to 29 percent during 2006. - Creditor composition (2004–06, in percent of the nominal debt; total = 100): - Multilaterals: 77 (2004), 78 (2005), 78 (2006) - IMF: 2 (2004) - IDA: 40 (2004), 42 (2005), 44 (2006) - Others: 35 (2004), 33 (2005), 32 (2006) - Official Bilaterals: 19 (2004), 19 (2005), 19 (2006) - Paris Club members: 12 (2004), 13 (2005), 12 (2006) - Non-Paris Club members: 4 (2004), 5 (2005), 7 (2006) - Commercial: 4 (2004), 3 (2005), 2 (2006) - Memorandum: Total nominal external debt of the central government (In US$ million): 553 (2004), 513 (2005), 598 (2006) - In percent of GDP: 55 (2004), 54 (2005), 48 (2006) - Medium-term macroeconomic assumptions (baseline): - Real GDP growth expected to average about 7 percent through 2012; conservatively assumed to slow gradually to 5 percent over the long term. - Annual inflation expected to stay between 2 and 3 percent. - FDI assumed to remain above 10 percent of GDP until 2015 then gradually decline. - Private current transfers, including emigrant remittances, assumed to decline from 20 percent of GDP in 2006 to 12 percent in 2027. - Prudent fiscal policy to maintain primary fiscal deficit below debt-stabilizing deficit. - Capital expenditures assumed to remain above 10 percent of GDP throughout the projection period. - Selected macro assumptions and comparisons (preserve values as presented): - Previous DSA / Current DSA (selected averages and indicators): - Real GDP growth: 6.8 / 6.2 (5 years ahead); 7.3 / 5.1 (6–20 years ahead) - Inflation: 2.6 / 2.2 (5 years ahead); 2.3 / 2.1 (6–20 years ahead) - Exports of G&S growth (in US dollars): 14.8 / 6.9 (5 years); 15.2 / 8.5 (6–20 years) - Imports of G&S growth (in US dollars): 8.9 / 9.0 (5 years); 14.0 / 6.0 (6–20 years) - Private transfers, incl. remittances (percent of GDP): 19.4 / 20.5 (5 years); 17.3 / 11.5 (6–20 years) - Current account balance (percent of GDP): -9.3 / -9.7 (5 years); -13.2 / -7.5 (6–20 years) - Foreign direct investment (percent of GDP): 3.5 / 3.2 (5 years); 12.2 / 2.0 (6–20 years) - Current acct. and FDI (Percent of GDP): -5.8 / -6.5 (5 years); -1.0 / -5.5 (6–20 years) - Grant element of new external borrowing: ... / 28.3 (previous); 27.9 / 9.3 (current) - Exchange rate, nominal currency per US dollar, p.a: 101.39 / 92.77 (previous); 79.49 / 92.17 (current) - Public sector revenue and grants (percent of GDP): 30.3 / 34.1 (previous); 29.2 / 28.8 (current) - Grants and concessional financing outlook: - Assumed decline in grants as percentage of GDP and in concessionality of new borrowing as Cape Verde graduates from LDC status in 2008. - Share of commercial financing in new external borrowing assumed to gradually increase to 85 percent until 2027. - Grant element of new external borrowing assumed to decline to zero. - Interest rate on domestic debt constant at 4.3 percent throughout the period. - Marginal borrowing in stress scenarios assumed on commercial terms. - Scenario comparison (2008-12, percent of GDP, period average): - Baseline vs Scaling-up: - Real GDP growth, 2007-2027: 5.8 / 5.8 - Imports of G&S (in US$): 78.8 / 72.4 - Capital expenditures: 12.6 / 14.5 - Fiscal balance: -3.2 / -5.2 - External current account balance: -12.1 / -12.3 - External central government debt sustainability — baseline findings: - NPV of central government external debt-to-GDP expected to decline: from 26 percent of GDP in 2007 to below 22 percent after 2009. - Ratios of debt-to-exports and to revenues remain below indicative thresholds. - Debt service ratios increase because commercial loans have shorter maturities, but remain below thresholds. - Low risk assessment contingent on tourism exports and FDI being sufficient to finance imports used as inputs in tourism. - Alternative scenarios and stress tests: - Even under extreme stress (hypothetical 30-percent devaluation of the exchange rate in 2008), which causes a one-off increase of 7 percent of GDP in the NPV of the debt, external debt ratios remain below thresholds. - Thresholds and selected ratios (Table 4, select entries as presented): - Thresholds based on classification as a strong performer. - NPV of debt in percent of GDP: Threshold = 50; 2007 = 26; 2017 = 21; 2027 = 18 (baseline and scale-up columns presented). - NPV of debt in percent of exports: Threshold = 200; 2007 = 60; 2017 = 37; 2027 = 28 (values shown in table). - NPV of debt in percent of revenues: Threshold = 300; 2007 = 84; 2017 = 75; 2027 = 63 (values shown in table). - Debt service in percent of exports: Threshold = 25; presented indicators for 2007/2017/2027. - Debt service in percent of revenues: Threshold = 35; presented indicators for 2007/2017/2027. *Source: Excerpts from IMF/World Bank country documentation and Joint Fund-Bank Debt Sustainability Analysis, November 2007.* ### 40. An alternative scenario of scaling-up borrowing under commercial terms and ### _cr0837 - 40. An alternative scenario of scaling-up borrowing under commercial terms and ### Scaling-up borrowing scenario: assumptions and mechanics - Assumes Cape Verde will borrow US$ 35 million on commercial terms in each of the five years covering 2008-12 in addition to the borrowing in the baseline scenario. - The US$ 35 million per year is used to scale-up public capital expenditure and is matched by a corresponding increase in imports. - The scenario simulates, for example, additional commercial borrowing to invest in the electricity sector in 2008 and the envisaged borrowing from the IBRD. - The additional interest expense arising from the scaling up of external borrowing is financed with domestic borrowing. - For prudence, economic growth is maintained at the same level of the baseline scenario. - Note: "This value corresponds to the ceiling for non-concessional external borrowing agreed under the PSI." ### Key quantified findings under the scaling-up scenario - The US$ 35 million borrowed in this scenario is described as "equivalent to 2 percent of GDP on average during 2008-12." - The risk of debt distress remains low; "All ratios remain well below the thresholds throughout the forecast horizon." - The additional borrowing "does not represent an important burden given that the debt is low and that GDP growth rate is still higher than the debt accumulation rate." - "Further, the debt ratios remain below threshold even if shocks are simulated to hit on top of the scaling up scenario." ### Total central government debt — baseline scenario findings - "In line with the PSI objectives, the total central government debt and guarantees remain below current level throughout the forecast horizon in the baseline scenario." - The domestic central government debt ratio is reduced to below 20 percent of GDP by 2008, "one year ahead of the PSI target (Table 8)." - After 2013, "the total central government debt-to-GDP ratio stabilizes around 34 percent of GDP (Figure 2)." - "The ratios of debt-to-revenue and debt service-to-revenue also suggest that roll-over difficulties are unlikely to arise." ### Alternative scenarios and stress-test results - Endogenous risk scenario (A1): - If prudent fiscal policies are not maintained, "the primary deficit returns to the historical levels, which is substantially higher than the debt-stabilizing level." - "Therefore, in this scenario the debt rises sharply (scenario A1 of Table 9, Figure 2)." - Footnote: "This historical scenario assumes also that GDP growth is at historical average of 7 percent, more optimistic than baseline projections." - Exogenous shock scenario (B2): - Extreme test: an exogenous shock temporarily widens the primary deficit to 11 percent of GDP during 2008-09 (scenario B2). - "Because in this scenario the debt ratios increase only temporarily, the low risk of debt distress is preserved throughout the period." - This conclusion "applies also to the situation where the extreme shock hits on top of the scale up scenario." ### Scaling-up scenario — aggregate debt sustainability conclusions - Under scaling up of borrowing and public investment, "the low risk of debt distress is preserved." - "The fiscal deficit during the 5 years of the scaling up is smaller than the debt-stabilizing deficit, causing the domestic debt to remain around the PSI target of 20 percent of GDP during the projection period (Table 5)." - "All the other total central government debt indicators remain within reasonable levels in the scaling up scenario, even if shocks are simulated to hit on top of the scaling up scenario (Tables 5 and 8, and Figure 2)." *Source: _cr0837 - 40. An alternative scenario of scaling-up borrowing under commercial terms and (IMF staff text provided).* ### 46. The debt sustainability analysis concludes that the risk of debt distress in Cape ### The debt sustainability analysis concludes that the risk of debt distress in Cape Verde is low. ### Key findings on debt distress risk - The risk of debt distress in Cape Verde is low. - The conclusion holds notwithstanding the conservative assumptions made in the baseline scenario including on financing terms. - The conclusion hinges on the assumption that FDI flows and tourism exports will fully offset the growth of imports caused by them. - The most important threat is a return to historical fiscal deficits, which highlights the need for continued fiscal prudence. - Based on the expectation that fiscal prudence will continue during the projection period, the assessment of distress risk is low. - The risk of debt distress remains low also under large exogenous shocks and under a 5-year scaling up of capital investment. ### Selected baseline projections and indicators (2004–2027, exact values as reported) - External debt (nominal) series (selected years, in percent of GDP): 57.4; 58.7; 52.8; 49.4; 44.9; 41.6; 38.9; 36.9; 35.7; 30.9; 21.3. - Change in external debt (selected values): -1.6; 1.4; -5.9; -3.5; -4.4; -3.3; -2.8; -2.0; -1.2; -0.9; -1.2. - Non-interest current account deficit (selected values, percent of GDP): 13.7; 2.8; 4.6; 9.5; 3.6; 9.0; 11.0; 12.1; 14.2; 13.1; 13.4; 12.1; 12.4; 9.7; 11.4. - Deficit in balance of goods and services (selected values, percent of GDP): 37.6; 27.8; 25.8; 29.1; 29.3; 31.0; 32.4; 30.2; 29.9; 25.9; 20.3. - Exports (selected values, percent of GDP): 32.0; 36.5; 42.3; 43.3; 45.6; 47.2; 48.2; 49.4; 50.8; 56.0; 62.4. - Imports (selected values, percent of GDP): 69.6; 64.3; 68.1; 72.4; 74.9; 78.2; 80.6; 79.7; 80.7; 81.9; 82.7. - Net FDI (negative = inflow) (selected values, percent of GDP): -7.4; -7.5; -9.4; -5.9; 3.1; -8.8; -11.0; -11.8; -12.6; -12.9; -12.9; -11.7; -11.0; -5.5; -9.3. - Endogenous debt dynamics (selected values): -6.4; -4.0; -8.3; -2.6; -2.9; -2.5; -2.3; -2.0; -1.8; -0.9; -0.4. - NPV of external debt (selected years, percent of GDP): 34.0; 31.0; 28.5; 26.7; 25.3; 24.5; 24.3; 23.4; 18.9. - NPV of external debt in percent of exports (selected values): 80.2; 71.6; 62.4; 56.5; 52.5; 49.6; 47.8; 41.7; 30.3. - Debt service-to-exports ratio (in percent, selected values): 11.2; 8.6; 5.7; 5.0; 4.5; 4.3; 3.8; 3.5; 3.3; 4.3; 6.6. - Total gross financing need (billions of U.S. dollars, selected values): 0.1; 0.0; 0.0; 0.0; 0.0; 0.0; 0.1; 0.0; 0.1; 0.1; 0.7. - Key macroeconomic assumptions (selected): Real GDP growth (in percent) — 4.3; 6.5; 10.8; 7.3; 2.5; 6.9; 7.7; 7.4; 7.4; 7.1; 6.8; 7.2; 5.0; 5.0; 5.2. - GDP deflator in US dollar terms (change in percent) (selected): 8.9; 2.2; 6.1; 2.0; 11.0; 11.8; 6.6; 4.3; 4.2; 4.9; 3.7; 5.9; 3.0; 2.8; 2.9. - Effective interest rate (percent) (selected values): 1.3; 1.2; 1.0; 12.4; 14.5; 1.0; 1.1; 1.2; 1.3; 1.3; 1.4; 1.2; 1.9; 3.1; 2.2. - Growth of exports of G&S (US dollar terms, in percent) (selected): 15.9; 24.1; 36.3; 18.1; 13.9; 22.4; 20.9; 16.0; 14.2; 15.2; 13.8; 17.1; 10.3; 8.1; 9.7. - Growth of imports of G&S (US dollar terms, in percent) (selected): 17.2; 0.6; 24.6; 11.8; 11.6; 27.0; 18.9; 17.0; 15.4; 11.0; 12.2; 16.9; 8.3; 8.0; 8.4. - Nominal GDP (billions of US dollars) (selected values): 0.9; 1.0; 1.2; 1.4; 1.6; 1.8; 2.0; 2.3; 2.5; 3.9; 8.3. ### Sensitivity analysis and stress tests (selected outcomes) - NPV of debt-to-GDP ratio and sensitivity panels show the baseline and multiple stress tests (Alternative Scenarios A1, A2, Scaling-up; Bound Tests B1–B6). Under these tests the ratios rise but the overall assessment remains low risk under most scenarios given continued fiscal prudence. - Example scenario highlights (percent ratios, selected): - NPV of debt-to-GDP ratio (baseline and scenarios, selected years): Baseline values and scenario envelopes are presented for 2007–2027 (tables and Figure 1). - NPV of debt-to-exports ratio and NPV of debt-to-revenue ratio increase under historical and most extreme shock scenarios but are reported across 2007–2027 in the sensitivity tables and figures. - Bound tests include shocks such as: - B1: Real GDP growth at historical average minus one standard deviation. - B2: Export value growth at historical average minus one standard deviation. - B3: US dollar GDP deflator at historical average minus one standard deviation. - B4: Net non-debt creating flows at historical average minus one standard deviation. - B5: Combination of B1–B4 using one-half standard deviation shocks. - B6: One-time 30 percent nominal depreciation relative to the baseline in 2008. ### Central government debt dynamics (selected baseline figures, 2004–2027) - Central government debt (percent of GDP, selected years): 88.9; 87.1; 77.3; 66.4; 59.6; 54.3; 50.1; 47.4; 45.8; 42.5; 36.6. - Foreign-currency denominated share of central government debt (selected): 54.6; 53.8; 48.0; 44.2; 40.2; 37.4; 34.9; 33.3; 32.4; 28.5; 19.9. - Primary deficit (percent of GDP, selected values): 1.3; 4.2; 3.2; 5.8; 5.3; 1.3; 1.9; 1.5; 1.0; 2.1; 2.1; 1.6; 1.7; 0.2; 1.3. - Revenue and grants (percent of GDP, selected): 32.1; 30.0; 29.9; 30.8; 28.7; 30.0; 30.4; 28.3; 28.3; 28.0; 28.0. - Grants (percent of GDP, selected values): 9.0; 6.3; 5.6; 7.8; 6.7; 4.9; 6.0; 6.1; 4.0; 3.9; 5.3; 3.4; 3.1; 3.3. - Automatic debt dynamics (selected values): -4.2; 2.9; -15.5; -7.8; -6.1; -4.8; -4.3; -4.0; -3.2; -1.9; -1.2. - NPV of central government debt (selected percent of GDP): 34.3; 33.3; 60.5; 46.9; 41.8; 38.2; 35.2; 33.2; 32.4; 33.4; 33.7; 34.0. - Gross financing need (selected percent of GDP): 37.0; 37.9; 34.8; 29.7; 27.5; 24.8; 22.4; 21.3; 20.1; 19.0; 21.2. - Debt service-to-revenue and grants ratio (in percent, selected): 21.1; 19.7; 15.8; 10.7; 11.1; 10.3; 9.2; 9.3; 8.8; 11.4; 17.7. ### Policy implications and recommendations (as reported) - Continue fiscal prudence to avoid a return to historical fiscal deficits—identified as the most important threat to debt sustainability. - Maintain macroeconomic stability and policies that support the exchange rate peg. - Sustain efforts to reduce public debt, build up international reserves, and create fiscal space to accommodate potential declines in concessional external financing as the country graduates from LDC status. - Strengthen public financial management, financial sector regulation and supervision, and energy sector reform. - Implement plans for an overhaul of the energy sector, including establishing a new base utility tariff structure and continuously applying fuel and utility price adjustment mechanisms to depoliticize price setting, safeguard the budget, and incentivize investment and efficiency gains. - Establish a financial intelligence unit and strengthen the framework to combat money-laundering and the financing of terrorism (plans for 2008 noted as welcome). ### Executive Board and country authority observations (selected) - IMF Executive Board completed the third review under the three-year Policy Support Instrument (PSI) for Cape Verde. - The PSI is intended to enhance sustainability of growth and development by maintaining a stable macroeconomic environment and moving forward with structural reforms. - The Board noted: “Growth is being sustained, bolstered by significant increases in foreign direct investment, especially in the tourism sector. Reflecting this, unemployment and poverty rates are falling.” - The Board observed that fiscal consolidation and the build-up of official reserves have proceeded faster than program expectations; targets for both domestic debt and official reserves initially set for 2009 are likely to be reached in 2008. - The Board maintained a positive assessment of Cape Verde’s past program performance under the PSI while noting remaining challenges in financial sector regulation and supervision, public financial management, and energy sector reform. *Source: Staff simulations.* ### 1. Cape Verde continues to maintain a productive program relationship with the Fund in ### Cape Verde continues to maintain a productive program relationship with the Fund in the context of the PSI ### Program performance and macroeconomic outcomes - Supported by the authorities’ strong policies, growth reached double-digit levels nearing 11 percent in 2006, mainly driven by the telecommunications and tourism sectors and construction. - Unemployment is estimated to have decreased significantly in 2006. - Growth is projected to remain strong at about 7 percent in 2007. - Real GDP is forecasted to grow by about 7 ¾ percent in 2008, given anticipated strong performance in the tourism sector and infrastructure investment. - After a spike in late-2006, consumer inflation has continued to decelerate and is expected to be subdued in 2008. - All quantitative assessment criteria were met at end-June 2007 with comfortable margins; initial program objectives were surpassed in a number of areas. - Domestic debt reduction proceeded more rapidly than projected at the beginning of the PSI arrangement. - Reserve accumulation continued at a faster pace than initially targeted under the PSI. ### Structural reforms and energy-sector measures - Improvements in tax administration contributed to mobilization of higher-than-projected tax revenues. - Two assessment criteria were not observed on full implementation of mechanisms for setting base utility tariffs and adjusting electricity, water, and fuel prices; key corrective measures were subsequently taken. - In October (year implied by context), authorities increased retail gasoline and diesel prices by 15 and 11 percent respectively. - The 2008 budget presented to the National Assembly makes no room for energy and utility subsidies. - Firm instructions were given to the economic regulatory agency (ARE) to adjust fuel prices as necessary to avoid building fiscal liabilities. - Authorities plan to finalize and publish during the first quarter of 2008 a mechanism for setting base electricity tariffs. - Important investments are planned to increase capacity and improve efficiency of the energy and water sectors, with expected increased private sector involvement to reduce fiscal liabilities. ### Policy and reform agenda — consolidating macroeconomic stability - The 2008 budget builds on conservative estimates of expenditures and revenues, reflecting strong fiscal discipline. - Authorities decided to avoid additional net borrowing; further domestic debt reduction is expected in 2008. - Targeted 20 percent debt-to-GDP ratio is expected to be met with a comfortable margin by the end of the program period. - Steps to avoid accumulation of arrears at government and municipal levels include assisting entities to improve budget execution and payment practices and clearing any arrears and deducting corresponding amounts from future government transfers. - Monetary policy will continue to be geared toward further accumulating foreign exchange reserves to support the peg to the euro and PSI objectives. - Central Bank of Cape Verde (BCV) will manage liquidity through appropriate issuance of short-term bills and monitor interest rate differentials with the euro area to avoid unsuitable shifts in remittance inflows. ### Policy and reform agenda — public sector financial management and tax administration - Integrated Online Budget Management System (SIGOF) provides real-time availability of some budget execution data; authorities plan to expand SIGOF to most municipalities and semi-autonomous institutes and decentralize budget execution. - A new Chart of Public Accounts building on modern accounting principles has been approved and is scheduled to be implemented in 2008. - Legislation on a new budget framework was submitted to the National Assembly. - Authorities agreed to conduct systematically a formal mid-year review of fiscal developments and set November 30 as the deadline for making any new spending commitments. - Authorities seek Fund technical assistance to press forward with PFM reforms. - Steps are being taken to enhance tax collection, especially among large taxpayers, building on IMF technical assistance recommendations. - Documents prepared for submission to the National Assembly include a draft General Tax Code, a new Code on Judicial Processes, and draft personal and corporal income tax bills. - Authorities are working to streamline tax exemptions and incentives and have expressed continued interest in IMF technical assistance. - Progress toward strengthening audit processes includes establishment of a customs audit court, submission of draft legislation relating to the Court of Auditors, and recruitment of additional tax inspectors to increase tax audits. ### Policy and reform agenda — financial sector regulation and supervision - BCV plans measures in 2008 to improve compliance with international standards on banking accounting. - Progress is being made on strengthening regulations on banks’ capital ratios and procedures for bank licensing. - Authorities would greatly appreciate an FSAP for Cape Verde to support financial sector development and address potential vulnerabilities. - BCV is contemplating further liberalization of the capital account to align with current operating circumstances for financial flows. - BCV is reaching information sharing agreements with supervisory bodies in home countries of institutions active in the offshore financial center. - Authorities intend to submit to the National Assembly draft AML/CFT legislation and a proposal for the establishment of a financial intelligence unit, consistent with AML/CFT recommendations from a Fund assessment mission. ### Misreporting issue and policy implications - At the time of the second review of the PSI, the Board granted a waiver for nonobservance of the assessment criterion on net domestic borrowing after program ceiling on domestic borrowing was reported to be exceeded by 0.8 percent of GDP. - It later appeared that excess net domestic borrowing relative to the program ceiling was 1.3 percentage points of GDP higher than initially reported; the underreporting was due to computing errors in pulling data off SIGOF. - Staff concluded this misreporting does not change the favorable assessment of Cape Verde’s performance under the PSI. - Authorities argue that the magnitude of deviation from an assessment criterion is not necessarily critical to program assessment and that such misreporting should be considered “de minimis.” - Authorities propose revisiting misreporting policies to consider “de minimis” misreporting cases only those which have an impact on the assessment of program performance, rather than relying exclusively on the size of the deviation. ### Conclusion and requests - Cape Verde continues to make notable progress toward PSI objectives; net domestic debt in percent of GDP follows a steep downward trend and reserve accumulation exceeds initial expectations. - Notable improvements in public sector financial management are reflected by progress in arrears prevention and public accounting. - Steps taken are expected to further strengthen financial sector supervision and regulation; energy sector reforms are helping reduce fiscal risks. - Authorities request Directors’ support for waivers for the two missed assessment criteria and for the misreporting occasioned by accounting errors, and support for completion of the third review of the PSI for Cape Verde. *IMF staff report and authorities’ letter of intent as provided in the source content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0837.pdf_