## _cr09198

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---

### Assessment and mission outcome
- Focus: Sixth PSI review centered on implications of the recession in the euro area on Cape Verde’s economy and policy responses to global shocks.
- Policy implementation: Continues to be strong; all but one end-December 2008 PSI quantitative targets were met.
- Staff recommendations:
  - Complete the sixth PSI review.
  - Grant a waiver on the nonobservance of the assessment criterion on net domestic assets (NDA) of the Bank of Cape Verde (BCV).
  - Approve the one-year PSI extension requested by the authorities (extension to July 30, 2010).
- Exchange rate regime: Conventional peg to the euro.
- Mission dates and team: April 3–15, 2009. Team: Lamin Leigh (head), Eduardo Castro, Nir Klein, Jean Frederic Noah Ndela (AFR), and Erik Oppers (MCM).

### Key program performance findings
- Quantitative targets and fiscal outcomes:
  - All but one end-December 2008 quantitative assessment criteria were met.
  - Fiscal and international reserves targets were observed by wide margins.
  - Net domestic borrowing in 2008 was far below the adjusted ceiling by 3 percent of GDP.
  - Domestic debt fell by one-fifth to 16 percent of GDP.
- Exception: NDA of the BCV exceeded the ceiling due to late-December prepayment of public debt using Treasury deposits to repurchase T-bonds maturing in 2010; NDA spiked temporarily but are now in line with program goals. Staff supports a waiver for NDA nonobservance (LOI ¶12).
- Structural reforms progress:
  - SOE balance sheets being monitored; report on contingent liabilities to be submitted to the Council of Ministers in June 2009.
  - New income tax codes to be submitted to Parliament in June.
- Financial sector assessment:
  - FSAP: onshore financial sector broadly sound; banks have negligible sub-prime exposure, large liquidity buffers, low loan-to-value ratios; some erosion in capital-asset ratios.
  - Risk: withdrawal of liquidity support by parent banks (mainly Portuguese) given majority foreign ownership.

### Recent developments and outlook (selected projections and indicators)
- Growth and tourism:
  - GDP growth expected to decelerate to 3½ percent in 2009 after robust 2007–08 performance due to recession in the euro area.
  - Tourist-nights grew 1.5 percent in H2 2008 despite 20 percent growth in hotel-beds during 2008.
  - Confidence barometer hit 5-year low in April 2009; construction and most sectors showed weakness.
- Inflation and exchange rate:
  - Four months of negative inflation since November 2008 as import prices fell.
  - 12-month inflation peaked at 10 percent (y/y) in October 2008 and fell to low single digits; staff projects inflation to decline to about 3¼ percent by year-end.
  - REER broadly in line with fundamentals and near long-term average; competitiveness adequate by export market share.
- External position and reserves:
  - Current account deficit projected to widen significantly in 2009; reserves decline limited because fiscal stimulus mainly financed by concessional loans already secured.
  - Net reserves (table excerpt): 250 260 316 368 268 250 265 (€ million).
- Fiscal table highlights (Percent of GDP):
  - Total revenues: 29.9 30.7 29.5 -1.2
  - Total expenditure: 31.1 36.2 38.5 2.3
  - Capital exp.: 12.4 14.8 17.4 2.7
  - Overall balance: -1.2 -5.5 -9.0 -3.5
  - Foreign financing, net: 2.7 4.8 7.5 2.7
  - Domestic financing, net: -0.9 0.7 1.5 0.8
  - Implicit grant element: 0.4 0.9 1.6 0.7
  - Adjusted balance: -0.8 -4.6 -7.4 -2.8

### Policy discussions and recommendations
- General policy stance:
  - Use fiscal and reserve buffers to smooth global shocks in 2009 while keeping medium-term debt sustainability in mind given the peg and recession uncertainty.
  - Improve fiscal–monetary coordination for systemic liquidity management.
  - Implement FSAP recommendations to reinforce onshore bank soundness and prepare a clear strategy for offshore banks.
- Fiscal policy specifics:
  - Authorities to implement substantial fiscal expansion in 2009 focused on the public investment program (PIP) mainly infrastructure, while protecting social expenditures.
  - Revised 2009 fiscal program: PIP expansion and decelerating tax revenues projected to increase fiscal deficit by about 3½ percentage points of GDP relative to the 2009 budget.
  - Financing: additional concessional loans already secured with development partners (notably Portugal).
  - Net domestic borrowing (the program’s fiscal anchor) to increase only slightly relative to budget; stimulus would lower reserves only marginally and not threaten the peg.
- Risks and cautions:
  - 2009 program will raise public external debt close to the debt-burden threshold if a large exogenous shock occurs; fiscal space significantly reduced.
  - Staff advised identifying recurrent spending cuts and moderating domestically-financed capital spending if recession is protracted and revenues decelerate further.
  - Do not expand domestic borrowing beyond the revised program; preserve foreign reserves consistent with the peg given vulnerabilities: small island economy, market rigidities, and nonresident deposits ≈ 50 percent of total deposits.
  - Concessional funds beyond secured amounts may be hard to obtain; domestic financing limited as banks’ balance sheets are already stretched.
- Contingency support:
  - Authorities can tap Portuguese credit line (500 percent of Cape Verde’s quota) if a more protracted recession leads to larger BOP need; Cape Verde drawn on the line twice since 1999.

### Program monitoring and extension
- Current PSI expires July 2009; authorities request one-year extension to July 30, 2010 as bridge to a new three-year PSI and plan an internal ex-post PSI assessment.
- Staff supports the one-year extension and NDA waiver given performance and corrective measures.

### Debt sustainability, fiscal framework, and structural benchmarks
- Authorities committed to conduct a DSA and build technical capacity; two new structural benchmarks agreed:
  - Mid-year fiscal review including 2009 fiscal program and debt-trajectory consistency with DSA (MEFP 5th PSI review, ¶8). Timing: End-August 2009.
  - Simplified MTFF for 2010–12 to be submitted to National Assembly and posted online with 2010 budget proposal; MTFF to show implied debt trajectory consistent with DSA. Timing: End-October 2009.
- Steps to improve public debt and financial management; monitoring contingent liabilities.
- New Law of SOE and Public Managers to improve state control and enable frail SOEs to be placed on viable footing.

### Strengthening monetary–fiscal coordination
- Monetary policy:
  - Domestic interest rates to follow euribor adjusted for country risk premium.
  - BCV policy rate held at 5¼ percent due to European liquidity crunch and increased risk premium.
  - Reserve requirements recently increased from 14 percent to 16 percent (described as temporary).
  - Potential scope to reduce policy rate if ECB continues cuts.
- Coordination measures and PSI benchmark:
  - Treasury to closely monitor BCV balance sheet to support liquidity management.
  - PSI benchmark: BCV to prepare memorandum delineating enhanced fiscal–monetary coordination (LOI ¶12) for endorsement by Minister and Governor. Timing: End-August 2009 / End-August 2009 for PSI Monitoring Committee discussion; approval by end-August 2009.
  - Possible pillars: systematic use of Treasury bills for liquidity management; joint monitoring of BOP to align responses with disturbance sources; account for quasi-fiscal operations from SOE restructuring (Electra, TACV).

### Financial sector safeguards and FSAP implementation
- Authorities committed to FSAP recommendations; key actions:
  - End forbearance with onshore banks; BCV to strengthen enforcement and maintain continuous indicative floor on banks’ capital asset ratios.
  - Government to reconsider offshore banking strategy after FSAP findings on reputational risk; closed a noncompliant offshore institution and will harmonize onshore/offshore regulatory frameworks.
  - PSI continuous indicative floor: regulatory capital ratio 10.0 percent (effective June 2009); BCV to inform IMF of measures if any bank’s capital ratio falls below 10 percent.

### Fiscal and macro projections (selected exact figures)
- Real GDP (annual percentage change series as shown in Table 1 header): 10.8, 7.8, 5.9, 3.5, 4.0, 6.6, 6.6, 6.7, 6.4.
- Consumer price index (annual average): 4.8, 4.4, 6.8, 3.4, 2.7, 2.0, 2.0, 2.0, 2.0.
- Exports of goods and services: 35.0, 14.1, 0.4, -6.8, 4.3, 13.2, 20.9, 17.0, 17.3.
- Gross international reserves (millions of euros, end of period): 194.9, 259.5, 277.1, 257.9, 271.2, 297.7, 340.0, 382.9, 438.0.
- External current account (including official current transfers, € millions): -47.7, -96.4, -143.5, -227.5, -195.1, -209.6, -225.7, -255.5, -269.7.
- External current account (percent of GDP): -5.0, -8.7, -12.1, -17.6, -14.2, -13.9, -13.5, -13.8, -13.2.
- Total nominal government debt (percent of GDP): 73.4, 59.7, 57.3, 63.2, 63.5, 62.7, 61.3, 59.2, 57.4.

### Fiscal accounts and monetary aggregates (selected exact series and levels)
- Revenue, grants, and net lending (selected levels, CVE million): 31,044; 35,131; 38,551; 39,187; 43,639; 41,964; 43,668; 45,181; 48,897; 54,526; 60,311.
- Total expenditure (selected levels, CVE million): 36,252; 35,986; 44,032; 40,715; 51,435; 54,758; 49,965; 51,438; 58,582; 63,807; 69,685.
- Overall balance including grants (CVE million): -5,208; -855; -5,481; -1,529; -7,796; -12,794; -6,298; -6,257; -9,685; -9,281; -9,374.
- Net domestic borrowing (selected, CVE million): 1,638; -2,567; -172; -1,972; 1,759; 4,451; 1,030; 1,856; 2,524; 2,580; 1,417.
- Capital expenditure (selected, CVE million): 12,415; 12,237; 17,581; 16,264; 20,990; 24,795; 21,526; 22,593; 25,152; 26,504; 28,683.
- Fiscal composition (percent of GDP): domestic revenue (incl. net lending) 24.1, 24.3, 25.0, 25.0, 25.5, 23.6, 24.7, 24.7, 24.0, 24.0, 24.2; total expenditure 34.6, 29.6, 33.6, 31.1, 36.2, 38.5, 32.9, 31.0, 31.8, 31.2, 30.8; overall balance incl. grants -5.0, -0.7, -4.2, -1.2, -5.5, -9.0, -4.2, -3.8, -5.3, -4.5, -4.1.

- Monetary survey (selected series, CVE million):
  - Broad money (M2): 85,441; 94,628; 102,089; 111,814; 116,797; 128,155; 142,2 (series truncated in source).
  - Net foreign assets (selected): 25,267; 31,049; 28,925; 28,009; 29,662; 32,807; 37,6 (series displayed).
  - Net domestic assets (selected): 60,174; 63,579; 73,164; 83,805; 87,135; 95,348; 104,5 (series displayed).
  - Credit to the economy (levels): 45,325; 56,896; 69,648; 76,135; 81,451; 89,206; 98,8 (series displayed).
  - Emigrant deposits: 27,250; 28,424; 29,494; 30,728; 32,098; 35,219; 39,0 (series displayed).
  - Reserve money (M0): 21,861; 24,041; 25,953; 28,764; 27,884; 30,589; 33,962.

### External sector and balance of payments (selected exact figures)
- Current account balance (including official transfers, € millions): -48; -96; -144; -228; -195; -210; -226; -256; -270.
- Trade balance (€ millions): -369; -485; -478; -558; -523; -542; -630; -731; -832.
- Services (net, € millions): 125; 183; 151; 146; 173; 166; 232; 294; 373.
  - Services credit (of which tourism): credit: 322; 399; 378; 360; 369; 418; 514; 610; 724; tourism: 173; 244; 230; 214; 218; 249; 313; 376; 451.
- Gross international reserves (millions of euros): 194.9; 259.6; 277.1; 257.9; 271.3; 297.8; 340.2; 383.0; 438.1.
- External public debt (percent of GDP): 45.2; 44.9; 49.3; 60.8; 66.5; 58.7; 71.1; 57.6; 67.6.

- Capital transfers (government) series: 14; 20; 18; 5; 9; 4; 6; 24; 25; 27; 30.
- Direct investment (net) (selected): 88; 94; 14; 48; 79; 96; 128; 149; 169; 183.
- Overall balance (percent of GDP): 4.7; 5.8; 1.2; -1.5; 1.0; 1.8; 2.5; 2.3; 2.7.

### Central bank and banking sector (selected levels)
- Central Bank (selected, CVE million): net foreign assets (Dec.): 20,489; 27,688; 29,673; 27,722; 29,376; 32,521; 37,386. Reserve money (M0): 21,861; 24,041; 25,953; 28,764; 27,884; 30,589; 33,962. Net domestic credit (selected): 71,248; 76,878; 90,987; 99,954; 104,711; 114,489; 125,4 (series shown).
- Deposit Money Banks (selected, CVE million): net foreign assets (Dec.): 4,778; 3,361; -827; 287; 287; 286; 285; 284; 283. Deposit liabilities to nonbank residents (Dec.): 77,707; 86,220; 93,375; 102,130; 106,751; 117,185; 130,1 (series shown). Credit to the economy (levels): 44,099; 55,733; 68,534; 75,015; 80,326; 88,075; 97 (series shown). Emigrant deposits (ratios): 0.35; 0.33; 0.32; 0.30; 0.30; 0.30.

### Program conditionality, adjusters, and quantitative assessment criteria
- Net domestic borrowing ceiling adjustments:
  - Adjusted upward by cumulative upward deviations in external debt service; cumulative downward deviations in nonproject external financial assistance and land sales relative to program assumptions; costs of restructuring SOEs up to CVE 1.5 billion.
  - Adjusted downward by cumulative downward deviation in external debt service and cumulative upward deviations in land sales.
- NDA definition: Reserve money minus net foreign assets of BCV, at current end-of-period exchange rates.
- Nonconcessional external debt ceiling: grant element < 35 percent (CIRRs); Portuguese precautionary credit line and Fund borrowings excluded.
- Floor on NIR (BCV) adjustments: upward/downward adjustments detailed with limits including € 13.6 million for SOE restructuring costs.
- Indicative continuous floor on individual bank regulatory capital ratio: 10.0 percent (continuous, effective June 2009).

- Selected program numeric entries and assumptions (as reported):
  - Floor on NIR of BCV: 250.0; 269.5.
  - Adjuster examples: -19.5; 13.1.
  - Ceiling on contracting or guaranteeing nonconcessional external debt (examples): 90.0; 78.4; 35.0.
  - Program assumptions — Nonproject external financial assistance: 2.4; 0.8; 1.5; 2.3; 3.1.
  - External debt service (assumptions): 2.6; 2.4; 0.5; 1.4; 2.1; 2.8.
  - Land sales (assumptions): 2.8; 1.0; 0.4; 1.0; 1.3; 1.6.
  - Clearance of end-2006 stock of domestic arrears (assumptions): 1.5; 1.3; 0.6; 0.8; 1.6; 2.5.
  - Banking sector indicative target: regulatory capital ratio 10.0 percent.

### Structural benchmarks, reporting, and statistical program
- Structural benchmarks status (2008–09) — highlights:
  - Compile consolidated balance-sheet and holding gains/losses for five SOEs: Timing End-Mar. 2009. Status: Met.
  - Submit draft individual and corporate income tax bills: Timing End-Oct. 2008. Status: Not Met (to be implemented in June).
  - Place financial controllers in each line ministry: Timing End-Mar. 2009. Status: Not Met (to be implemented in June).
  - Prepare quarterly report on interest-sensitivity of balance-of-payments flows: Timing End-Dec. 2008. Status: Not Met (to start quarterly by end-June 2009).
  - New benchmarks: mid-year fiscal review; MTFF 2010–12; BCV memorandum on monetary–fiscal coordination; Policy Strategy Memorandum on offshore sector.
- Reporting requirements and definitions (Technical Memorandum highlights):
  - Net domestic borrowing defined and reported quarterly within five weeks after quarter-end.
  - NDA, NIR, nonconcessional debt definitions and reporting timetables specified.
  - Nonaccumulation of new domestic and external payments arrears; arrears reporting frequencies and definitions provided.
- Statistics program and deficiencies:
  - Data broadly adequate for surveillance but significant improvements needed in government finance, national accounts, and BOP.
  - INE ongoing overhaul: update benchmark/base year 1980 → 2002, adopt 1993 SNA, introduce Tourism Satellite Accounts.
  - GFS and monetary statistics improvements under way; gaps remain in emigrant deposit tracing and reconciliation of debt statistics.

### Monitoring and mission schedule
- Review schedule (selected):
  - September 2009: Seventh PSI review (against June 2009 assessment criteria).
  - November 2009 – May 2010: Eighth (last) PSI review against December 2009 assessment criteria (missions scheduled March 2010 and May 2010).

*Source: IMF staff report (Executive Summary and informational annex, discussions April 3–15, 2009; Letter of Intent, May 29, 2009).*

### Executive Summary

### _cr09198 - Executive Summary

### Assessment and mission outcome
- Focus: Sixth PSI review discussions centered on the implications of the recession in the euro area on Cape Verde’s economy and policy responses to global shocks.
- Assessment: Policy implementation under the PSI-supported program continues to be strong; all but one end-December 2008 PSI quantitative targets were met.
- Staff recommendation:
  - Complete the sixth PSI review.
  - Grant a waiver on the nonobservance of the assessment criterion on net domestic assets of the Bank of Cape Verde (BCV).
  - Approve the one-year PSI extension requested by the authorities.
- Exchange rate regime: Cape Verde’s exchange rate arrangement is a conventional peg to the euro.
- Mission dates and team: Discussions took place during April 3–15, 2009. The team comprised Lamin Leigh (head), Eduardo Castro, Nir Klein, Jean Frederic Noah Ndela (all AFR), and Erik Oppers (MCM).

### Key program performance findings
- Quantitative targets:
  - All but one end-December 2008 quantitative assessment criteria were met.
  - Fiscal and international reserves targets were observed by wide margins.
  - Net domestic borrowing in 2008 was far below the adjusted ceiling by 3 percent of GDP and domestic debt fell by one-fifth to 16 percent of GDP.
- Exception:
  - The ceiling on net domestic assets (NDA) of the BCV was exceeded, largely due to prepayment of public debt in late December using Treasury deposits at the BCV to repurchase T-bonds maturing in 2010. NDA spiked temporarily but are now in line with program goals. Staff supports a waiver for NDA nonobservance given corrective measures to better coordinate fiscal and monetary operations (LOI ¶12).
- Structural reforms:
  - Progress steady though some delays occurred. Balance sheets of SOEs are being monitored; a report on contingent liabilities will be submitted to the Council of Ministers in June 2009. New income tax codes will be submitted to Parliament in June.
- Financial sector:
  - FSAP concluded the onshore financial sector is broadly sound. Banks have negligible sub-prime exposure, large liquidity buffers, low loan-to-value ratios, though some erosion of capital-asset ratios was observed. Withdrawal of liquidity support by parent banks is a potential risk given majority foreign ownership (mainly Portuguese).

### Recent developments and outlook (selected projections and indicators)
- Growth:
  - After robust growth in 2007 and 2008, GDP growth is expected to decelerate to 3½ percent in 2009 due to recession in the euro area weakening external inflows.
  - Tourist-nights grew only 1.5 percent in the second half of 2008 despite 20 percent growth in hotel-beds during the year.
  - Confidence barometer reached its 5-year low in April 2009; most sectors including construction showed weakness.
- Inflation and exchange rate:
  - Since November 2008, Cape Verde experienced 4 months of negative inflation as import prices fell.
  - 12-month inflation peaked at 10 percent (year on year) in October 2008 and has fallen to low single digits; staff projects inflation to decline to about 3¼ percent by year-end.
  - Real effective exchange rate (REER) remains broadly in line with fundamentals and near its long-term historical average; competitiveness appears adequate based on export market share.
- External position and reserves:
  - Overall current account deficit projected to widen significantly in 2009, leading to some reserve decline, but decline limited because fiscal stimulus will be financed largely by concessional loans already secured.
  - Net reserves (table excerpt): 250 260 316 368 268 250 265 (€ million).
- Fiscal outcomes and revisions (as presented in the fiscal position table):
  - Cape Verde: Fiscal Position, 2008–09 (Percent of GDP)
    - Total revenues29.930.729.5-1.2
    - Total expenditure31.136.238.52.3
    - Of which: Capital exp.12.414.817.42.7
    - Overall balance-1.2-5.5-9.0-3.5
    - Foreign financing, net2.74.87.52.7
    - Domestic financing, net-0.90.71.50.8
    - Implicit grant element0.40.91.60.7
    - Adjusted balance-0.8-4.6-7.4-2.8

### Policy discussions and recommendations
- General agreement between staff and authorities:
  - Use fiscal and reserve buffers to smooth global shocks in 2009 while keeping medium-term debt sustainability in mind, particularly given the exchange rate peg and uncertainty about the depth and duration of the global recession.
  - Improve coordination of fiscal and monetary operations for systemic liquidity management.
  - Implement FSAP recommendations to reinforce onshore bank soundness and prepare a clear strategy for offshore banks.
- Fiscal policy stance:
  - Authorities will implement a substantial fiscal expansion in 2009 relative to the 2008 outturn and original 2009 budget, focusing on the public investment program (PIP), mainly infrastructure, while protecting social expenditures.
  - The revised 2009 fiscal program: deceleration of tax revenues and the PIP expansion projected to increase the fiscal deficit by about 3½ percentage points of GDP compared to the 2009 budget.
  - The PIP increase will be financed by additional concessional loans already secured with development partners (notably Portugal).
  - Net domestic borrowing, the program’s fiscal anchor, will increase only slightly relative to budget; the fiscal stimulus would lower reserves only marginally and not threaten the peg.
- Risks and cautions from staff:
  - The 2009 fiscal program will raise public external debt to the debt burden threshold if a large exogenous shock occurs.
  - The revised program significantly reduces fiscal space; any additional severe shock could bring external debt close to the debt-burden threshold.
  - Staff advised identifying recurrent spending cuts and, if needed, moderating the current high pace of domestically-financed capital spending should the global recession be protracted and revenues decelerate further.
  - It would not be prudent to expand domestic borrowing beyond the revised fiscal program. Preserve foreign reserves consistent with the peg given vulnerabilities: small island economy, market rigidities hindering price adjustment, and large stock of nonresident deposits (about 50 percent of total deposits).
  - Concessional funds beyond what has been secured may become hard to obtain and domestic financing is limited because banks’ balance sheets are already stretched.
- Contingency and support:
  - In the event of a more protracted global recession and a larger balance of payments need, the authorities can tap the credit line with Portugal (500 percent of Cape Verde’s quota). Cape Verde has drawn on the credit line only twice since 1999.

### Monitoring and program extension
- The current PSI arrangement expires in July 2009; authorities seek a one-year extension as a bridge for a new three-year PSI and plan an internal ex-post assessment of the PSI during the extension.
- Given PSI performance to date and the authorities’ policies set out in the LOI, staff supports the one-year extension request.

*Source: IMF staff report (Executive Summary, discussions April 3–15, 2009).*

### 8.      The authorities generally agreed with the staff’s analysis and the need to keep in

### _cr09198 - 8.      The authorities generally agreed with the staff’s analysis and the need to keep in

### Debt sustainability, fiscal framework, and structural benchmarks
- Authorities agreed with staff’s analysis and the need to keep in mind medium-term debt sustainability considerations.
- Commitment to formulate fiscal policy based on a Debt Sustainability Analysis (DSA) and welcomed staff’s assistance in building technical ability to conduct a DSA.6
- Two new PSI structural benchmarks agreed to strengthen debt management capacity and ensure fiscal program consistency with debt sustainability:
  - A new mid-year fiscal review will be conducted. The review will be enhanced by including the fiscal program for 2009 and examining whether that the implied debt trajectory is consistent with debt sustainability. This analysis will draw on the ongoing DSA that the authorities committed to conduct (MEFP 5th PSI review, ¶8).
  - A simplified medium term fiscal framework (MTFF) for 2010–12 will be prepared. It will be submitted to the National Assembly and posted online along with the proposal for the 2010 budget. The MTFF will also be enhanced by showing the implied debt trajectory and ensuring that it is consistent with debt sustainability, drawing on the DSA underway.
- Authorities taking steps to improve public debt and financial management and reduce fiscal risks by closely monitoring contingent liabilities.
- Implementation of a new law of SOE and Public Managers to improve state control and regulation over SOEs (LOI ¶13). Under this framework, frail SOEs will be placed on a viable footing.

### Strengthening monetary and fiscal coordination
- Staff and the BCV agreed that domestic interest rates should continue to follow the euribor adjusted for country risk premium to smooth fluctuations in key financial flows.
- Current policy rate and reserve requirement context:
  - The BCV holds its policy rate at 5¼ percent due to the liquidity crunch in Europe and increased risk premium for peripheral economies.
  - Recent increase in banks’ reserve requirements from 14 percent to 16 percent was described as temporary and intended to halt excessive credit growth and minimize balance sheet pressures for the BCV.
- Potential policy space:
  - The BCV may have some scope to reduce its policy rate, especially if the European Central Bank (ECB) continues to reduce it policy rate.
- Staff recommendation:
  - Treasury should closely monitor the balance sheet of the BCV to provide necessary support to manage liquidity.
- PSI benchmark: BCV will prepare a memorandum to clearly delineate the key elements of enhanced fiscal-monetary coordination to be endorsed by both the Minister and the Governor (LOI ¶12).
- Possible pillars for enhanced coordination:
  - Treasury bills can be used more systematically for liquidity management, improving transparency because interest costs of liquidity management will be recorded in fiscal accounts (in line with the FSAP recommendation).
  - Given the likely decline in reserves in 2009, the memorandum will call for close joint monitoring of the balance-of-payments to align policy responses with the source of disturbances (financial flows or domestic-demand led pressures on the current account).
  - BCV and the Treasury will take into account the impact of quasi-fiscal operations on systemic liquidity, particularly those arising from restructuring large SOEs such Electra or TACV, the national airline.

### Shielding the financial sector and FSAP implementation
- Authorities committed to implementing FSAP recommendations to safeguard financial sector stability.7
- Actions following approval of the new anti-money laundering law:
  - To end forbearance with regard to onshore banks, the BCV will strengthen enforcement tools to induce banks to keep capital ratios continuously above the prudential requirement. The PSI-supported program now includes a continuous indicative floor on bank’s capital asset ratios and the BCV will inform the Fund of measures taken if a bank is below the regulatory minimum.
  - Government will reconsider its strategy for offshore banks following the FSAP’s conclusion that the offshore sector is a source of reputational risk. Authorities noted the government will take stock of costs and benefits for keeping the offshore sector in place and propose a strategy to the Council of Ministers (LOI ¶15).
  - Authorities closed a noncompliant offshore institution and agreed to harmonize the regulatory framework for onshore and offshore banks to end forbearance and limit financial sector vulnerabilities.

### Program monitoring
- Assessment criteria, benchmarks, and indicative targets for the next two reviews are in Tables 1 and 2 of the Letter of Intent. The review schedule is in Table 8.

### Staff appraisal — key findings and policy guidance
- Cape Verde is weathering the global economic crisis well; policy implementation under the PSI-supported program remains sound.
- Recent macroeconomic strengths cited:
  - Domestic public debt was reduced sharply.
  - Foreign reserves accumulated substantially.
  - External debt was kept stable.
- Near-term outlook and policy stance:
  - Near-term growth prospects have moderated significantly given the recession in the euro area.
  - Authorities’ decision to use fiscal and reserve buffers to smooth global shocks is appropriate, especially given plans to protect social spending.
  - The envisaged fiscal stimulus does not pose a threat to the exchange rate peg and the REER continues to be broadly in line with fundamentals.
- Risks and recommended responses:
  - The revised fiscal program for 2009 will increase public debt, bringing projected public external debt close to the debt burden threshold should a further large shock occur.
  - Staff encourages authorities to adjust expenditures if the global recession is more protracted than currently anticipated, further pushing down tax revenues. In such circumstances, additional borrowing would not be prudent given the need to preserve foreign reserves consistent with the peg.
  - Monetary management is broadly appropriate, but coordination with fiscal policy needs strengthening to better address systemic liquidity needs. Plans to use Treasury securities for monetary operations and further develop the money market are welcome.
  - Authorities need to implement FSAP recommendations to strengthen the financial sector. The Bank of Cape Verde’s commitment to end forbearance with regard to onshore banks and ensure capital ratios above prudential requirements is welcomed. The government’s prompt decision to close a noncompliant offshore bank and reassess offshore banking strategy is commended.

*Source: _cr09198 - 8.      The authorities generally agreed with the staff’s analysis and the need to keep in*

### 18.      Staff recommends completion of the sixth review under the PSI and the

### _cr09198 - 18.      Staff recommends completion of the sixth review under the PSI and the

### Program recommendation, conditionality, and authorities' actions
- Staff recommends completion of the sixth review under the PSI and the extension of the PSI until July 30, 2010.
- Staff supports granting the corresponding waiver for the temporary non-observance of the end-December 2008 assessment criterion on net domestic assets of the Bank of Cape Verde, based on the strength of the authorities’ policies and corrective actions.
- Staff supports the authorities’ approach of conducting an internal ex-post assessment of the PSI prior to requesting a new PSI, noting strong ownership of the program.

### Fiscal performance and projections (Figure 1; Tables 1–3 highlights)
- Fiscal trajectory and drivers:
  - The fiscal deficit will widen because revenues will decline and capital expenditure will expand, while recurrent expenditure will be partially cut.
  - Therefore domestic debt will rise gently and foreign reserves will decline moderately.
- Key projections and indicators (selected exact figures from tables):
  - Real GDP (annual percentage change): 10.8, 7.8, 5.9, 3.5, 4.0, 6.6, 6.6, 6.7, 6.4 (series across years shown in Table 1 header).
  - Consumer price index (annual average): 4.8, 4.4, 6.8, 3.4, 2.7, 2.0, 2.0, 2.0, 2.0.
  - Exports of goods and services: 35.0, 14.1, 0.4, -6.8, 4.3, 13.2, 20.9, 17.0, 17.3.
  - Gross international reserves (millions of euros, end of period): 194.9, 259.5, 277.1, 257.9, 271.2, 297.7, 340.0, 382.9, 438.0.
  - External current account (including official current transfers, € millions): -47.7, -96.4, -143.5, -227.5, -195.1, -209.6, -225.7, -255.5, -269.7.
  - External current account (percent of GDP): -5.0, -8.7, -12.1, -17.6, -14.2, -13.9, -13.5, -13.8, -13.2.
  - Total nominal government debt (percent of GDP): 73.4, 59.7, 57.3, 63.2, 63.5, 62.7, 61.3, 59.2, 57.4.
- Budgetary aggregates (Table 2 / Table 3 excerpts, millions of Cape Verde escudos unless otherwise indicated):
  - Revenue, grants, and net lending (selected series): 31,044; 35,131; 38,551; 39,187; 43,639; 41,964; 43,668; 45,181; 48,897; 54,526; 60,311.
  - Total expenditure (selected series): 36,252; 35,986; 44,032; 40,715; 51,435; 54,758; 49,965; 51,438; 58,582; 63,807; 69,685.
  - Overall balance, including grants (budget basis): -5,208; -855; -5,481; -1,529; -7,796; -12,794; -6,298; -6,257; -9,685; -9,281; -9,374.
  - Net domestic borrowing (selected): 1,638; -2,567; -172; -1,972; 1,759; 4,451; 1,030; 1,856; 2,524; 2,580; 1,417.
  - Capital expenditure (selected): 12,415; 12,237; 17,581; 16,264; 20,990; 24,795; 21,526; 22,593; 25,152; 26,504; 28,683.
- Fiscal composition (percent of GDP series from Table 3):
  - Domestic revenue (incl. net lending): 24.1, 24.3, 25.0, 25.0, 25.5, 23.6, 24.7, 24.7, 24.0, 24.0, 24.2.
  - Total expenditure: 34.6, 29.6, 33.6, 31.1, 36.2, 38.5, 32.9, 31.0, 31.8, 31.2, 30.8.
  - Overall balance, including grants (percent of GDP): -5.0, -0.7, -4.2, -1.2, -5.5, -9.0, -4.2, -3.8, -5.3, -4.5, -4.1.

### Monetary sector and central bank balance sheet (Figure 2; Tables 5–7 highlights)
- Monetary dynamics and central bank:
  - The decline in foreign reserves will shrink the balance sheet of the central bank as the Treasury draws deposits at the BCV.
  - Together with the rise in required reserves, this limits the need for open market operations (OMOs).
- Banking sector funding and credit:
  - The fiscal stimulus will not crowd out private credit as banks' funding base will continue to be sound.
- Key monetary figures (exact series from Table 5, monetary survey, millions of Cape Verde escudos):
  - Broad money (M2): 85,441; 94,628; 102,089; 111,814; 116,797; 128,155; 142,2 (truncated in source but shown as series).
  - Net foreign assets (selected): 25,267; 31,049; 28,925; 28,009; 29,662; 32,807; 37,6 (series displayed).
  - Net domestic assets (selected): 60,174; 63,579; 73,164; 83,805; 87,135; 95,348; 104,5 (series displayed).
  - Credit to the economy (levels): 45,325; 56,896; 69,648; 76,135; 81,451; 89,206; 98,8 (series displayed).
  - Emigrant deposits: 27,250; 28,424; 29,494; 30,728; 32,098; 35,219; 39,0 (series displayed).
  - Reserve money (M0, selected levels): 21,861; 24,041; 25,953; 28,764; 27,884; 30,589; 33,962.

### External sector (Figure 3; Table 4 highlights)
- Current account and financing:
  - Widening current account deficit driven by moderating exports and rising infrastructure-related imports.
  - FDI will decline but capital grants and concessional loans will finance the deficit, thereby keeping reserves ahead of the original PSI target.
- Selected external sector numbers (Table 4, millions of euros and percent of GDP):
  - Current account balance (including official transfers, € millions): -48; -96; -144; -228; -195; -210; -226; -256; -270.
  - Trade balance (€ millions): -369; -485; -478; -558; -523; -542; -630; -731; -832.
  - Services (net, € millions): 125; 183; 151; 146; 173; 166; 232; 294; 373.
    - Services credit series (of which tourism): credit: 322; 399; 378; 360; 369; 418; 514; 610; 724; of which tourism: 173; 244; 230; 214; 218; 249; 313; 376; 451 (series across years).
  - Gross international reserves (millions of euros): 194.9; 259.6; 277.1; 257.9; 271.3; 297.8; 340.2; 383.0; 438.1.
  - External public debt (percent of GDP): 45.2; 44.9; 49.3; 60.8; 66.5; 58.7; 71.1; 57.6; 67.6 (series shown).

### Balance of payments and financing
- Capital and financial account (net) and components (Table 4 excerpts):
  - Capital transfers (government): 14; 20; 18; 5; 9; 4; 6; 24; 25; 27; 30 (series across years presented).
  - Direct investment (net) (selected): 88; 94; 14; 48; 79; 96; 128; 149; 169; 183 (series shown).
  - Net official flows / trust fund disbursements and amortization details are presented in the source tables.
- Overall balance (percent of GDP): 4.7; 5.8; 1.2; -1.5; 1.0; 1.8; 2.5; 2.3; 2.7 (series shown).

### Central bank and deposit money bank surveys (Tables 6–7)
- Central Bank (Table 6 selected numbers, millions of Cape Verde escudos):
  - Net foreign assets (Dec. series): 20,489; 27,688; 29,673; 27,722; 29,376; 32,521; 37,386.
  - Reserve money (M0): 21,861; 24,041; 25,953; 28,764; 27,884; 30,589; 33,962.
  - Net domestic credit (selected): 71,248; 76,878; 90,987; 99,954; 104,711; 114,489; 125,4 (series shown).
- Deposit Money Banks (Table 7 selected numbers, millions of Cape Verde escudos):
  - Net foreign assets (Dec. series): 4,778; 3,361; -827; 287; 287; 286; 285; 284; 283.
  - Deposit liabilities to nonbank residents (Dec. series): 77,707; 86,220; 93,375; 102,130; 106,751; 117,185; 130,1 (series shown).
  - Credit to the economy (levels): 44,099; 55,733; 68,534; 75,015; 80,326; 88,075; 97 (series shown).
  - Emigrant deposits (levels and ratios): emigrant deposits levels series shown and emigrant deposits (ratio to total deposits): 0.35; 0.33; 0.32; 0.30; 0.30; 0.30.

### Risks, dynamics, and implications
- Reserve dynamics:
  - While reserves are projected to decline moderately, capital grants and concessional loans are projected to finance the external deficit and keep reserves ahead of the original PSI target (as per narrative and Figure 3).
- Monetary policy space:
  - Shrinking central bank balance sheet and higher required reserves limit the need for OMOs.
- Banking sector:
  - Banks’ funding base remains sound and fiscal stimulus is not expected to crowd out private credit.

### Proposed work program and mission schedule (Table 8)
- September 2009: Seventh PSI review against June 2009 assessment criteria.
- November 2009 – May 2010: Eighth (last) PSI review against December 2009 assessment criteria (missions scheduled March 2010 and May 2010 as listed).

*Source: _cr09198 - 18.      Staff recommends completion of the sixth review under the PSI and the (IMF staff report content provided).*

### APPENDIX I

### APPENDIX I

### Recent developments and program performance
- The government reaffirms commitment to the Policy Support Instrument (PSI) and formally requests a one-year extension of the PSI; the current three-year PSI was approved in July 2006 and is due to expire in July 2009.
- Discussions for the 6th review and the extension request were held in Praia during April 3−15, 2009.
- The one-year extension will serve as a bridge to a new three-year PSI starting in 2010 and will include an ex-post assessment of progress under the PSI.
- Growth and inflation in 2008:
  - Growth during 2008 is estimated to be in line with trend growth of 6–7 percent, supported by tourism, remittances, FDI and public works.
  - Inflation declined to low single digit as a result of the decline in energy and food prices and the exchange peg with the euro.
- PSI targets and benchmarks for end-December 2008 were broadly met:
  - All but one quantitative target were observed.
  - Targets met: net foreign reserves of the central bank (BCV) and net domestic borrowing of the central government.
  - The ceiling on net domestic assets (NDA) of the BCV was exceeded due to unusual market conditions in December 2008 and pre-payment of domestic bonds maturing in 2010 by the Treasury; a waiver for nonobservance of the assessment criterion is requested.
  - The Treasury has replenished its deposits at the BCV, bringing the NDA level in line with the program; further corrective measures are described in ¶12 and ¶14.
- Structural measures implementation:
  - Statistics of state-owned enterprises compiled; a report on contingent liabilities to be submitted to the Council of Ministers by end-June.
  - Financial controllers to be placed in line Ministries by end-June.
  - New Income Tax Codes to be submitted to Parliament in June.
  - Quarterly reports on interest-sensitivity of balance-of-payments flows delayed due to difficulties obtaining bank data; expected to start quarterly by end-June 2009.

### Macroeconomic objectives and policies
- Reserve and debt objectives during the extension:
  - Reserve levels will remain between 3½–4 months of imports.
  - Domestic debt will remain below 20 percent of GDP.
- Growth and inflation outlook:
  - Real GDP growth is expected to slow in 2009–10 compared to the 2009 budget forecast due to projected global slowdown in tourism and FDI flows; offsetting fiscal policies will continue to sustain growth.
  - The outlook is subject to large margins of error given uncertainty about the depth and duration of the global recession.
  - CPI inflation forecast to average about 3–4 percent in 2009-10.
- Program monitoring:
  - The seventh and eighth reviews under the PSI are scheduled to be completed by end-November 2009 and end-May 2010, respectively.
  - The government will regularly update the IMF and provide data for monitoring; will consult the IMF on adoption of any appropriate measures.

### Fiscal policy
- Countercyclical stance:
  - The government will adopt a countercyclical fiscal policy to offset the decline in private external flows while preserving debt sustainability and macroeconomic stability.
  - The budget deficit is now projected to increase relative to the 2009 budget due to deceleration of tax revenues from lower growth.
  - Public investment program will be expanded above the original 2009 budget as a discretionary measure, focusing on projects with higher domestic content.
  - Social spending will be protected.
- Financing and contingency:
  - The higher fiscal deficit will be financed by additional concessional loans already secured with development partners to support activity while preserving foreign reserves and debt sustainability.
  - As contingency measures, the government stands ready to take offsetting adjustments if a more protracted global recession has a larger impact on total revenues; will explore efficiency gains and moderate capital spending with high import content.
  - Will press ahead to enact the Tax Exemptions Code and the new Income Tax Code to repeal tax exemptions and expand the tax base.
- Structural benchmarks to ensure debt sustainability:
  - A new mid-year fiscal review will include projections for end 2009 and justify that external borrowing in the current year is consistent with debt sustainability; this exercise will draw on the DSA to be conducted in early 2009 ahead of the 2010 budget.
  - Presentation of a new Medium-Term Fiscal Framework (MTFF) for 2010–12 in the budget write-up (“Enquadramento”) showing implied debt trajectory and consistency with debt sustainability; this will draw on the 2009 DSA.
- Medium-term debt strategy (MTDS) and debt management:
  - The government will develop and implement a MTDS with technical assistance from the Fund and the World Bank.
  - Reinforced staff for the Debt Management Unit; will strengthen debt statistics, institutional framework, procedure manuals, and coordination between monetary and fiscal policies.

### Coordination of fiscal and monetary policy; SOE contingent liabilities
- Coordination measures:
  - The MTDS will consider FSAP recommendations to use Treasury securities for monetary policy operations to reduce net credit to the central government at the BCV.
  - Ministry of Finance will have monthly meetings with the BCV Board to monitor macroeconomic developments; Treasury will take policy actions if needed to limit burden on the BCV (¶12).
  - BCV will prepare a short memorandum describing enhanced coordination for liquidity management as a new structural benchmark under the extended PSI; to be discussed by the PSI monitoring committee by end-July 2009 and sent to the Minister of Finance and Governor of BCV for approval by end-August 2009.
- State-owned enterprises (SOEs):
  - Compiled SOE statistics (a PSI benchmark) confirmed immediate action is needed to limit fiscal risks from SOEs; report presented to the Council of Ministers (a PSI benchmark).
  - Council of Ministers decided to put electricity company Electra and the airline TACV on viable restructuring plans.
  - Government will monitor SOEs, widen coverage and timeliness of SOE statistics, and update risk assessment continuously.
  - To avoid fiscal risks, government will enact Law of State Enterprises and Public Managers to improve control and monitoring, establish rules and procedures, and enable restructuring; aim is to make parastatals result/objective oriented.

### Monetary management and financial sector policies
- Monetary policy stance:
  - BCV will continue passive monetary management consistent with the exchange rate peg and a largely open capital account.
  - Domestic interest rates will be set to follow the euribor adjusted for country risk premium to smooth short term capital flows.
  - Given expectations of a protracted global recession and potential further ECB rate declines, there may be scope for marginally reducing the BCV policy rate.
  - Treasury will assist BCV to control systemic liquidity; over time BCV will focus on the short end of the yield curve and the Treasury on the long end.
  - Legislation will be amended to address the tax wedge between returns on Treasury and BCV securities; each vintage of securities will have a uniform interest rate to facilitate secondary trading.
  - As passive monetary management takes hold, BCV will increasingly focus on financial stability and enabling efficient money markets.
- Financial sector strengthening and PSI benchmarks:
  - FSAP weaknesses: onshore banks’ small capital buffers drove capital ratios temporarily below the 10 percent minimum during fall 2008; offshore banks pose reputational risk due to size and lighter regulation.
  - New PSI benchmarks:
    - End forbearance with the onshore sector: BCV will promptly inform the Fund of measures taken if any bank’s capital ratio falls below the regulatory minimum; BCV will strengthen enforcement tools to keep banks’ capital ratios above the minimum. This minimum level is a new continuous quantitative indicative target in the PSI.
    - Revisit strategy for the offshore sector: government will present a Policy Strategy Memorandum to the Council of Ministers making a clear choice between substantially strengthening the offshore sector or winding it down. The memorandum will reassess tolerability of offshore sector risks given limited fiscal revenues and employment benefits and risks from scale (a deposit base more than twice the country's GDP), contagion to the onshore sector, and reputational damage.
  - If Council of Ministers decides to retain the offshore sector, only offshore banks with clear ownership links to well-supervised banks in mature markets will be allowed, while enhancing BCV’s supervision unit to monitor offshore banks.

*Letter of Intent, May 29, 2009*

### 16.      Finally, given the uncertain times in the global financial environment and the

### _cr09198 - 16.      Finally, given the uncertain times in the global financial environment and the

### Crisis response framework
- The government of Cape Verde is developing and putting in place a crisis response framework to address the uncertain global financial environment and the likelihood of a more protracted global recession.
- The government’s efforts will cover the needed legislative changes required to execute the crisis response system promptly when the need arises.

### Quantitative assessment criteria and indicative targets (highlights)
- Ceiling on net domestic borrowing of the central government (excluding borrowing for clearance of arrears and net late payments).
  - The ceiling will be adjusted upward by:
    - the cumulative upward deviations in external debt service;
    - the cumulative downward deviations in nonproject external financial assistance and land sales relative to program assumptions;
    - the costs of restructuring state-owned enterprises up to a limit of CVE 1.5 billion.
  - The ceiling will be adjusted downward by:
    - the cumulative downward deviation in external debt service;
    - the cumulative upward deviation in land sales relative to program assumptions.
- Ceiling on net domestic assets (NDA) of the Bank of Cape Verde (BCV).
  - NDA defined as reserve money minus net foreign assets of the BCV, evaluated at current end-of-period exchange rates.
  - Program ceilings for NDA will be adjusted upward by:
    - the cumulative upward deviations in external debt service;
    - the cumulative downward deviations in nonproject external financial assistance relative to program assumptions;
    - the costs of restructuring state-owned enterprises up to a limit of CVE 1.5 billion.
  - The ceiling will be adjusted downward by the cumulative downward deviation in external debt service relative to program assumptions.
- Ceiling on contracting or guaranteeing of new nonconcessional external debt with original maturity of more than one year by the central government.
  - Nonconcessional external debt defined as debt with a grant element of less than 35 percent, calculated using CIRRs published by the OECD’s Development Assistance Committee.
  - Debt rescheduling and debt reorganization excluded from limits.
  - Portuguese government precautionary credit line and borrowings from the Fund excluded from the definition of nonconcessional external debt.
- Ceiling on outstanding stock of nonconcessional external debt with maturity less than one year by the central government.
  - Short-term nonconcessional external indebtedness assessment criterion is continuous; the short-term definition excludes normal short-term (less than one year) import-related financing.
- Floor on net international reserves (NIR) of the BCV.
  - NIR defined as gross international reserves of the BCV net of its external reserve liabilities, calculated at current exchange rates.
  - Program floors for the NIR will be adjusted downward by:
    - the cumulative upward deviations in external debt service;
    - the cumulative downward deviations in nonproject external financial assistance relative to program assumptions;
    - the costs of restructuring state-owned enterprises up to a limit of € 13.6 million.
  - The floor will be adjusted upward by the cumulative downward deviation in external debt service relative to program assumptions.
  - If Cape Verde participates in any SDR allocation(s) between June 30, 2009 and the test date, the floor will be adjusted upwards by the equivalent of the amount of the cumulative additional SDR allocation(s) up to the test date measured at program exchange rates.
- Floor on the regulatory capital ratio of individual banks.
  - Indicative floor: 10.0 percent (continuous, all test dates; banks to inform Fund of measures if capital ratio falls below 10 percent, continuous effective June 2009).

### Selected numeric values from program tables and program assumptions (as reported)
- Floor on net international reserves of the Bank of Cape Verde (BCV): 250.0; 269.5 (table entries).
- Adjuster examples and test date adjustments appearing in tables: -19.5; 13.1.
- Ceiling on contracting or guaranteeing of nonconcessional external debt (example entries): 90.0; 78.4; 35.0.
- Program assumptions — Nonproject external financial assistance (including credit line): 2.4; 0.8; 1.5; 2.3; 3.1.
- External debt service (assumptions): 2.6; 2.4; 0.5; 1.4; 2.1; 2.8.
- Land sales (assumptions): 2.8; 1.0; 0.4; 1.0; 1.3; 1.6.
- Clearance of end-2006 stock of domestic arrears (assumptions): 1.5; 1.3; 0.6; 0.8; 1.6; 2.5.
- Banking sector indicative target: regulatory capital ratio 10.0 percent.

### Structural benchmarks (2008–09): objectives, benchmarks, timing, status
- Strengthen tax base
  - Submit the draft individual and corporate income tax bills to the National Assembly.
  - Timing: End-Oct. 2008. Status: Not Met. To be implemented in June.
- Promote financial stability
  - Prepare a quarterly report on balance of payments flows, including assessment of interest sensitivity of non-resident flows into the banking system.
  - Timing: End-Dec. 2008. Status: Not Met. To be implemented in June.
- Strengthen public financial management
  - Place financial controllers in each line ministry to monitor budget execution as specified in Regulatory Decree 2/2007 of 15 January.
  - Timing: End-Mar. 2009. Status: Not Met. To be implemented in June.
- Strengthen debt management
  - Compile:
    - Other Economic Flows arising from holding gains or losses for five state-owned enterprises (ASA, TACV, Enapor, Electra and IFH) relative to their 2007 results (holding gains and losses defined in IMF’s Government Finance Statistics Manual 2001) (MEFP ¶9).
    - Consolidated balance-sheet of five state-owned enterprises (ASA, TACV, Enapor, Electra and IFH) and detail their debt by maturity, currency, residency, and state guarantees (MEFP ¶9).
  - Timing: End-Mar. 2009. Status: Met.
- Strengthen debt management
  - Submit to the Council of Ministers a report on contingent liabilities of the state assessing potential risks based on 2007 or more recent data, including risks from state-owned enterprises (MEFP ¶9).
  - Timing: End-Mar. 2009. Status: Not Met. To be implemented in June.
- New structural benchmarks (timing and objectives)
  - Conduct a mid-year review of fiscal performance, including projections for end 2009, justifying that envisaged borrowing is consistent with debt sustainability (LOI ¶10). Timing: End-August 2009.
  - Include a medium-term fiscal framework (MTFF) for 2010-2012 in the 2010 budget’s write up (“Enquadramento”) describing implied debt trajectory and justifying envisaged borrowing is consistent with debt sustainability (LOI ¶10). Timing: End-October 2009.
  - BCV to prepare a short memorandum on strengthening monetary-fiscal policy coordination in managing liquidity to be discussed by PSI Monitoring Committee and endorsed by Ministry of Finance and BCV (LOI ¶12). Timing: End-August 2009.
  - Inform the Fund of measures taken if capital ratio of one (or more) banks falls below 10 percent (LOI ¶15). Timing: Continuous effective June 2009.
  - Present a Policy Strategy Memorandum to the Council of Ministers on the offshore sector (LOI ¶15). Timing: End-September 2009.

### Definitions and reporting requirements (technical memorandum of understanding)
- 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 the calendar year of the stock of arrears as of end of previous year; and
    - (2) cumulative payments during first three months of the 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 for in budget law (late payments or atrasados).
  - Reporting: Quarterly data from Ministry of Finance and Public Administration within five weeks after end of each quarter on government domestic revenue by category; external budget support grants; government expenditure (including primary current expenditure, domestic and external interest payments, capital expenditure, and estimates of externally project financed capital expenditure); gross payment and gross accumulation of domestic accounts payable (atrasados); gross payment and gross accumulation of domestic payments arrears; external loan receipts and principal payments; external arrears payments and accumulation; bank and nonbank financing; privatization and land sale receipts; and any other revenue, expenditure, or financing not included above.
- Net domestic assets (NDA) of the BCV:
  - Defined as reserve money minus net foreign assets of the BCV, evaluated at current end-of-period exchange rates. Reserve money comprises bank reserves and deposits of monetary institutions and private sector with the central bank, and cash in circulation.
  - Reporting: Preliminary monthly balance sheets of the BCV and the consolidated commercial banks transmitted monthly with maximum delay of five weeks; definitive monthly BCV balance sheet provided as soon as available.
- Ceilings on nonconcessional external debt:
  - Nonconcessional external debt = grant element < 35 percent (calculated using CIRRs).
  - Reporting: Government to consult Fund staff before assuming liabilities where uncertain whether instrument falls under assessment criterion. Details of all new external debt (including government guarantees), indicating terms and creditors, to be provided quarterly within five weeks of end of each quarter.
- Net international reserves (NIR) of the BCV:
  - Gross reserves include gold, holdings of SDRs, 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 comprise liabilities to nonresidents contracted by the BCV with original maturity of less than a year, any net off-balance-sheet position of the BCV, any arrears on principal and interest to external creditors and suppliers, and purchases from the IMF.
  - Reporting: Table on the NIR prepared by the BCV transmitted on a weekly basis, maximum delay of two weeks.
- Nonaccumulation of new domestic payments arrears:
  - Government will not accumulate any new domestic payments arrears; monitored via monthly execution of cash-flow plan and corresponding release of budget appropriations.
  - For programming, a domestic payment obligation to suppliers is 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/timing subject to good faith negotiations.
  - Reporting: Ministry of Finance and Public Administration to submit quarterly a detailed table of stock of domestic payments arrears, including accumulation, payment, rescheduling and write-off during quarter, within four weeks after end of quarter.
- Nonaccumulation of external payments arrears:
  - Government will not accumulate any new external payments arrears on a continuous basis; monitored through monthly execution of cash-flow plan and corresponding release of budget appropriations.

*Attachment I: Technical Memorandum of Understanding — definitions, adjusters, and reporting requirements as specified in the memorandum.*

### 15.      External arrears are defined as total external debt-service obligations of the

### _cr09198 - 15.      External arrears are defined as total external debt-service obligations of the

### External arrears: definition and scope
- External arrears are defined as total external debt-service obligations of the government that have not been paid by the time they are due, except where agreements between the government and creditors explicitly provide for a grace period after such obligations falling due.
- External arrears exclude arrears on external debt, pending the conclusion of debt-rescheduling agreements.

### Reporting requirements for arrears and debt-service
- Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the Ministry of Finance and Public Administration, within five weeks of the end of each quarter.
- The government will inform the Fund staff immediately of any accumulation of external arrears.

### Other data requirements (timing and frequency)
- Exports and imports (volume and prices), 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.
- The Statement of Other Economic Flows as defined in the IMF Manual GFSM2001 relative to holding gains/losses of the previous year with Enapor, Electra, ASA, TACV, and IFH will be transmitted on an annual basis within three months after the end of the following year (15 months after the closing date).
- The consolidated balance sheet of Electra, Enapor, ASA, TACV and IFH relative to the previous year will be transmitted on an annual basis within three months after the end of the following year (15 months after the closing date).
- The table of Financial Soundness Indicators and the regulatory capital ratios of individual banks will be transmitted to the IMF on a monthly basis within six weeks after the end of each month. The nomination of individual banks is optional.

### Fund relations and key financial figures (selected)
- Membership Status: Joined: November 20, 1978; Article VIII.
- Quota: 9.60 (SDR Million) 100.00 percent of quota.
- Fund holdings of currency: 9.59 (SDR Million) 99.93 percent of quota.
- Reserve Position: 0.02 (SDR Million) 0.17 percent of quota.
- SDR Department net cumulative allocation: 0.62 (SDR Million) 100.00 percent of allocation; Holdings 0.05 7.47.
- Outstanding PRGF Arrangements: 7.78 (SDR Million) 81.03 percent of quota.
- Latest PRGF arrangement: PRGF Apr 10, 2002 — Jul 31, 2005 Amount Approved 8.64 (SDR Million) Amount Drawn 8.64 (SDR Million).
- Stand-By arrangement: Feb 20, 1998 — Mar 15, 2000 Amount Approved 2.50 (SDR Million) Amount Drawn 0.00 (SDR Million).

### Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming years and items (as presented):
  - Principal  0.741.481.731.611.24
  - Charges/Interest  0.04 0.030.030.020.01
  - Total  0.78 1.511.751.621.25
- Note: “When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.”

### Statistics issues — summary findings and planned improvements
- Overall assessment: Data provision has some shortcomings, but is broadly adequate for surveillance. Substantial improvements are needed in government finances, national accounts, and balance of payments.
- Participation and planning:
  - Cape Verde has participated in the GDDS since February 2004.
  - Plans for improvements are posted on the Fund’s DSBB; monetary and financial sector metadata updated in August 2007.
  - A comprehensive statistical master plan developed by the National Statistical Institute (INE); estimated cost US$15 million required to implement the plan through 2010, with development partners having committed a substantial part of that amount.

### Real sector statistics: findings and actions
- Weaknesses:
  - Significant weaknesses remain, including a lack of reliable demand-side GDP.
  - Timeliness remains a concern despite improvements; base year for constant price estimates is outdated.
  - Labor market statistics are weak: unemployment data compiled with long delays and no wage data.
- Ongoing actions:
  - INE is overhauling national accounts: updating benchmark and base years from 1980 to 2002 and adopting the 1993 SNA.
  - Objective: timely compilation of GDP by industry and expenditure categories at current and constant prices and institutional sector accounts.
  - INE will introduce Tourism Satellite Accounts to measure upstream linkages and import content of tourism exports.
- Capacity constraints:
  - Full implementation of the 1993 SNA requires substantial improvement in source data collection; 2006 STA mission found critical needs, especially for the business survey and staffing capacity.

### Price statistics
- A revamped CPI was released in February 2008 with new weights and an updated commodity basket; previous CPI used weights from 1989.
- INE received assistance from the National Statistics Institute of Portugal and STA CPI missions (May–June 2006, October 2006, October 2007).

### Government finance statistics (GFS)
- Improvements:
  - GFS compilation system being upgraded with GDDS TA.
  - SIGOF expanded to cover all semi-autonomous institutes and most municipalities by end-2007.
  - New chart of government accounts (PNCP) to be implemented in 2009 adopting accrual accounting and double-entry principles.
  - Authorities have started reporting GFS for publication in the GFS Yearbook.
- Remaining concerns:
  - Quality issues: large statistical discrepancies, inconsistency between flows and stocks, and recording of arrears accumulation and clearance not in line with best practices.
  - Delays in donor reporting of project financing affect fiscal data accuracy.
  - Multilateral debt statistics differ from creditor data; debt service projections cannot be reconciled with the debt stock.

### Monetary and financial statistics
- Quality and timeliness are adequate.
- March 2007 STA mission helped BCV finalize standardized report forms (SRFs); SRF-based monetary data published in the IFS Supplement since June 2007 and aligned with the Monetary and Financial Statistics Manual.
- An integrated monetary database meeting STA, AFR, and BCV needs is in place.
- Gaps remain in tracking the source and direction of changes in emigrant deposits, affecting assessment of interest sensitivity and policy stance.

### External sector statistics
- Improvements with STA assistance: accuracy, periodicity, and timeliness of balance of payments statistics have continued to improve.
- Greater use of surveys and the International Transactions Reporting System expanded data sources and coverage, aligning largely with the 5th edition of the Balance of Payments Manual.
- Remaining gaps: tracking of large external flows—FDI, emigrant deposits, and remittances.
- Dissemination: quarterly BOP data are regularly disseminated on the BCV website; regular and timely transmission to STA resumed in 2007 for publication.
- BCV does not compile an International Investment Position statement.

### Common Indicators Required for Surveillance (selected entries, as of April 30, 2009)
- Exchange Rates: Date of Latest Observation 4/29/09, Date Received 4/30/09, Frequency of Data D, Reporting D, Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 04/28/09 (Latest Observation), 04/29/09 (Date Received), Frequency D (Data), W (Reporting), M (Publication).
- Reserve/Base Money: 04/28/09 (Latest Observation), 04/29/09 (Date Received), D W M.
- Broad Money: Nov-08 (Latest Observation), Dec-08 (Date Received), M M M.
- Central Bank Balance Sheet: 04/28/09, 04/29/09, D W M.
- Consolidated Balance Sheet of the Banking System: Nov-08 (Latest Observation), Dec-08 (Date Received), M M M.
- Interest Rates: Mar-09 (Latest Observation), Apr-09 (Date Received), M M M.
- Consumer Price Index: Mar-09 (Latest Observation), Apr-09 (Date Received), M M M.
- Central Government revenue/expenditure/balance/composition of financing: Dec-08 (Latest Observation), Feb-09 (Date Received), Q Q Q.
- Stocks of Central Government and Central Government-Guaranteed Debt: Dec-08 (Latest Observation), Feb-09 (Date Received), A A A.
- External Current Account Balance: Dec-08 (Latest Observation), Feb-08 (Date Received), Q Q Q.
- Exports and Imports of Goods and Services: Dec-08 (Latest Observation), Feb-08 (Date Received), Q Q Q.
- GDP/GNP: 2007 (Latest Observation), Apr-09 (Date Received), A A A.
- Gross External Debt: Dec-08 (Latest Observation), Feb-09 (Date Received), A A A.
- International Investment Position: 2007 (Latest Observation), Aug-08 (Date Received), A A A.

*Source: IMF—Cape Verde: Sixth Review Under the Policy Support Instrument and Request for a One-Year Extension of the Policy Support Instrument—Informational Annex (prepared by the African Department, approved June 2, 2009).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09198.pdf_