## _cr1229

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**Canonical URL:** [_cr1229](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1229.pdf)

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### Executive Summary — macroeconomic developments and risks
- Program: 15-month PSI supported macroeconomic stability while allowing some fiscal deficit widening for expanded capital investments.
- Growth and inflation:
  - GDP growth: projected about 5 percent in 2011.
  - Consumer price inflation: 4.5 percent in 2011 (year-on-year). Core inflation remains subdued.
- Monetary actions (BCV):
  - Extended reserve requirements to government deposits in July 2011.
  - Restarted regular auctions to absorb liquidity in November 2011.
  - Raised reserve requirement on deposit liabilities by two percentage points to 18 percent on January 1, 2012.
  - Raised policy rate by 150 basis points to 5.75 percent on January 1, 2012.
- External sector:
  - Balance of payments deficit: about 37 million euros in 2011.
  - Reserve coverage: estimated at 3 months of imports at end-2011.
  - Contributions to the gap: higher food and fuel prices 34 million euros; lower current transfers 13 million euros; lower FDI 21 million euros.
- Financial sector vulnerabilities:
  - Nonperforming loans increased but remain modest; key risks from construction/real estate loan impairment, slowing emigrant deposits, portfolio shifts of large depositors, and offshore sector transition.
- Fiscal: 2011 fiscal deficit below budget; spending execution held below budget to offset lower revenues and reduce domestic borrowing.
- Policy needs:
  - Contain credit expansion and minimize domestic budget financing until import growth slows and balance of payments improves.
  - Rebuild reserves (3 months considered relatively low given peg and exposure).
  - Enhanced monetary–fiscal coordination to balance fiscal restraint and interest rate increases while rebuilding reserves.

### Program performance, missed targets, and corrective actions
- Overall assessment:
  - Mixed performance under the 15-month PSI; two of eight quantitative assessment criteria for end-September 2011 were missed (BCV NDA and NIR).
  - Waivers granted at first review in July 2011 for missed criteria (seen as temporary/minor).
- Drivers of missed targets:
  - External shocks: food and fuel price increases; euro area financial disarray; weak balance of payments and unwinding of central bank bills.
  - Delays in foreign assistance disbursements reduced government deposits at BCV.
  - End-September shortfalls: BCV NDA missed by 2.0 percent of GDP; NIR missed by 4.1 percent of GDP.
- Authorities’ corrective actions (by end-December 2011):
  - Fiscal tightening: government reduced spending well below budgeted amounts while preserving the social safety net.
  - Monetary tightening: BCV extended reserve requirements and restarted regular open market operations.
  - Outcomes: BCV NDA growth reduced to close about two-thirds of the gap with the missed end-September NDA target; reserve losses partially reversed, ending year with a reserve loss of about one-half of a month of import coverage.
- Structural benchmarks:
  - Seven benchmarks: five met (some after end-September deadline), two outstanding (submission to parliament of the financial system and tax laws — being redrafted, expected early 2012).
  - Met achievements: memoranda on monetary–fiscal cooperation and financial stability committee; fungible treasury bonds; expanded contingent liabilities reporting; completion of MTDS.

### Staff recommendation and PSI status
- Recommendation: complete the PSI second review and grant waivers for nonobservance of end-September NDA and NIR.
- Rationale:
  - Corrective fiscal and monetary actions have started to rebuild reserves and brought domestic credit growth close to program objectives by end-December 2011.
  - Structural benchmarks largely completed or near completion.

### Key macroeconomic projections (selected series from Table 1)
- Real GDP: 3.7 (2009), 5.4 (2010), 5.0 (2011), 5.1 (2012), 5.2 (2013), 5.3 (2014), 5.4 (2015), 5.5 (2016)
- Real GDP per capita: 2.3 (2009), 3.9 (2010), 3.6 (2011), 3.7 (2012), 3.8 (2013), 3.9 (2014), 4.0 (2015), 4.0 (2016)
- GDP deflator: 4.2 (2009), 3.3 (2010), 3.9 (2011), 3.4 (2012), 2.9 (2013), 2.9 (2014), 2.8 (2015), 2.7 (2016)
- Consumer price index (annual average): 1.0 (2009), 2.1 (2010), 4.6 (2011), 3.2 (2012), 2.8 (2013), 2.1 (2014), 2.0 (2015), 2.0 (2016)
- Exports of goods and services: -15.1 (2009), 17.7 (2010), 19.6 (2011), 11.1 (2012), 11.3 (2013), 10.4 (2014), 9.4 (2015), 8.7 (2016)
- Imports of goods and services: -6.3 (2009), 7.4 (2010), 18.1 (2011), 3.2 (2012), 7.6 (2013), 8.1 (2014), 6.2 (2015), 6.3 (2016)

### Monetary and balance-sheet indicators (selected)
- Net foreign assets (percent change): -1.5 (2009), 0.9 (2010), -2.7 (2011), 2.0 (2012), 5.3 (2013), 3.6 (2014), 2.0 (2015), 3.5 (2016)
- Net domestic assets (percent change): 5.0 (2009), 5.3 (2010), -4.2 (2011), 4.0 (2012), 1.2 (2013), 3.1 (2014), 4.9 (2015), 3.6 (2016)
- Credit to the economy (percent change): 8.0 (2009), 6.7 (2010), -5.0 (2011), 4.5 (2012), 1.2 (2013), 3.7 (2014), 5.0 (2015), 5.0 (2016)
- Broad money (M2, percent change): 3.5 (2009), 6.2 (2010), -6.9 (2011), 6.0 (2012), 6.5 (2013), 6.7 (2014), 6.9 (2015), 7.1 (2016)
- Reserve money (M0, percent change): 0.9 (2009), -0.9 (2010), -2.0 (2011), 1.4 (2012), 1.5 (2013), 1.5 (2014), 1.6 (2015), 1.6 (2016)

### External sector and reserves (selected)
- External current account (excluding official transfers, percent of GDP): -21.1 (2009), -18.8 (2010), -20.3 (2011), -14.8 (2012), -13.5 (2013), -12.8 (2014), -11.1 (2015), -9.9 (2016)
- External current account (including official transfers, percent of GDP): -15.6 (2009), -12.4 (2010), -15.1 (2011), -12.3 (2012), -10.2 (2013), -9.3 (2014), -8.2 (2015), -6.9 (2016)
- Gross international reserves (months of prospective imports): 3.9 (2009), 3.6 (2010), 3.0 (2011), 3.0 (2012), 3.3 (2013), 3.5 (2014), 3.5 (2015), 3.7 (2016)
- Gross international reserves (millions of euros, memorandum): 275.4 (2009), 294.6 (2010), 258.0 (2011), 274.8 (2012), 326.3 (2013), 364.2 (2014), 391.3 (2015), 442.7 (2016)
- Selected BOP items (millions of euros): Current account (incl. official transfers): -180 (2010), -156 (2011), -207 (2012); Trade balance: -487 (2010), -513 (2011), -619 (2012); Services (net): 115 (2010), 155 (2011), 204 (2012); Current transfers (net): 223 (2010), 257 (2011), 257 (2012)

### Fiscal outcomes and debt (selected)
- Revenue (millions of Cape Verde escudos): 36,540 (2010), 38,695 (2011), 43,735 (2012), 41,705 (2013), 40,737 (2014), 18,919 (H1 2015), projections through 2016 up to 61,634
- Domestic revenue (millions): 29,690 (2010), 30,033 (2011), 35,157 (2012), 33,856 (2013), 36,709 (2014)
- Tax revenue (millions): 25,676 (2010), 26,391 (2011), 29,915 (2012), 29,864 (2013), 32,092 (2014)
  - Income and profit taxes: 8,059 (2010), 7,865 (2011), 8,906 (2012), 9,126 (2013), 9,698 (2014)
  - Consumption taxes: 11,300 (2010), 12,221 (2011), 13,944 (2012), 13,814 (2013), 15,421 (2014)
  - International trade taxes: 5,219 (2010), 5,388 (2011), 5,927 (2012), 5,921 (2013), 5,927 (2014)
- External grants (millions): 6,850 (2010), 8,662 (2011), 8,578 (2012), 7,849 (2013), 4,028 (2014)
- Expenditure (millions): 44,493 (2010), 53,366 (2011), 59,261 (2012), 56,713 (2013), 57,037 (2014)
- Overall balance, including grants (millions): -7,953 (2010), -14,671 (2011), -15,526 (2012), -15,008 (2013), -16,300 (2014)
- Nominal GDP (memorandum): 127,069 (2010), 138,355 (2011), 151,049 (2012), projections through 226,059 (2016)
- External debt (millions, selected): 58,822 (2010), 71,032 (2011), 81,983 (2012), 97,027 (2013), 114,771 (2014)
- Domestic debt (millions, net of deposits): 20,830 (2010), 22,503 (2011), 25,292 (2012), 28,083 (2013), 28,603 (2014)
- Total debt (millions): 79,653 (2010), 93,535 (2011), 107,275 (2012), 125,111 (2013), 143,374 (2014)

### Debt sustainability, stress tests, and policy implications (Box 1 and DSA)
- Staff DSA: public debt burden remains sustainable but vulnerable to exogenous shocks; private sector external debt relatively high and a concern given the peg.
- Baseline public debt trajectory: public debt projected to peak at high levels, with public debt to GDP rising to 87.4 percent in 2014 (Box 1 projection) before gradual improvement.
- Reserve coverage baseline: projected to average 3.0 months of prospective imports between 2011 and 2015 (previous projection: 4.1 months).
- Alternative scenarios and stress tests:
  - One-time 30 percent nominal depreciation in 2012 (exchange rate shock) causes largest/protracted breaches of PV external debt-to-GDP thresholds.
  - Tail risk scenario assumptions:
    - (i) growth and FDI fall by 50.0 percent from baseline for each year 2012–2014;
    - (ii) exports as a percent of GDP fall by 10.0 percent from baseline for each year 2012–2014;
    - (iii) interest rate on marginal external debt reaches five percent with a grace period of two years.
  - Result: margin of comfort for some debt indicators can be quickly eroded; private sector external debt adds vulnerability.
- Contingent liabilities and SOE risks:
  - Contingent liabilities (selected companies): 11.5 percent of GDP in 2010.
  - TACV and Electra pose high fiscal risk; updated financial information on TACV lacking.
  - World Bank expected to approve in 2012 an energy loan to Electra (US$60 million) (as reported in source).
- Staff policy guidance:
  - Reduce fiscal deficit trajectory faster by scaling back public investment borrowing, strengthen own revenues, and broaden tax base.
  - Strengthen domestic debt markets as concessional foreign financing access declines.
  - Raise reserve coverage target to at least four months of imports by end of a new PSI.
  - Prioritize development of analytical capacity in Ministry of Finance for debt management analysis.

### Financial sector soundness and supervision
- Selected end-year indicators (Table 4):
  - Regulatory capital to risk-weighted assets: 15.6 (2010), 14.5 (Sep-11)
  - Regulatory tier 1 capital to risk-weighted assets: 14.4 (2010), 13.5 (Sep-11)
  - Nonperforming loans to total loans: 4.0 (2010), 6.9 (Sep-11)
  - Return on assets: 0.7 (2010), 0.4 (Sep-11)
  - Liquid assets to total assets: 12.5 (2010), 13.6 (Sep-11)
- Recommendations:
  - Continue strengthening banking supervision for onshore and offshore sectors.
  - Implement financial stability committee framework and updated financial system legislation promptly.
  - Supervision vigilance emphasized given growing vulnerabilities.

### Structural benchmarks (status summary, Table 7)
- Met: Issue fungible treasury bonds (end-June 2011).
- Not met: Submit draft individual and corporate income tax bills to National Assembly (end-June 2011).
- Met: Present cross debt between SOEs in contingent liabilities report (end-June 2011).
- Met with delay: BCV–Ministry memorandum to expand/ formalize financial stability committee (end-September 2011).
- Met with delay: BCV–Ministry fiscal–monetary coordination agreement (end-September 2011).
- Met: Create MTDS and present to council of ministers (end-September 2011).
- Not met: Submit financial framework law (unifying onshore and offshore banks) to National Assembly (end-December 2011).

### Social policy, labor, and structural reform priorities
- Social safety net: provides good protection to poor and vulnerable; authorities cautious about reforms that might jeopardize adequacy.
- Labor market: double-digit unemployment persists; need for more inclusive growth and alignment of labor market incentives with skills supply.
- SOE reform: staff urged redoubled efforts on Electra and TACV, with objective that unit costs of electricity and water fall to competitive levels.
- Fiscal consolidation: sustain tight control of current expenditures; implement tax reforms (planned 2013) to broaden tax base and raise own revenues.

### Relations with the Fund, technical assistance, and data priorities
- Membership and legal status: Joined November 20, 1978; Article VIII.
- Quota: 9.60 — 100.00; Fund holdings of currency: 9.59 — 99.93.
- Latest financial arrangements: ECF arrangement Apr 10, 2002 (Amount Approved 8.64 SDR million; Amount Drawn 8.64).
- Technical assistance (selected since 2004): extensive TA from FAD, STA, MCM, and LEG on VAT/tax, national accounts, BOP, GFS, banking supervision, MTDS, liquidity management, legal drafting.
- Statistical priorities: improvements needed in national accounts, financial sector, balance of payments; INE plans to publish quarterly GDP by 2012 and implement 1993 SNA; GFS and monetary statistics improvements ongoing.

- Press Release No.12/28 (January 30, 2012): Executive Board completed second and final PSI review; waivers granted. Key Board statements emphasized policy restraint to safeguard peg, build buffers, increase domestic revenue, contain current spending, proceed cautiously on capital spending, rely on concessional borrowing, and strengthen banking regulation/supervision.

*Source: IMF staff report (cr1229) — Executive Summary, DSA material, Box 1, Letter of Intent, and annexes as provided in the supplied content.*

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

### _cr1229 - Executive Summary

### I. Introduction
- The 15-month PSI program supported the government’s policy goals, including reinforcing macroeconomic stability while accommodating some widening of the fiscal deficit for expanded capital investments.
- Cape Verde has made noticeable progress over the last decade; per capita income has reached over US$3,000. The prime minister is serving a third consecutive term.

### II. Recent Developments and Economic Outlook
- Growth and inflation
  - GDP growth is projected to have slowed to about 5 percent in 2011.
  - Consumer price inflation rose to 4.5 percent in 2011 (year-on-year). Core inflation remains subdued.
- Monetary conditions and exchange rate
  - The BCV tightened its monetary stance after mid-2011 by:
    - Extending reserve requirements to government deposits in July 2011.
    - Restarting regular auctions to absorb liquidity in November 2011.
    - Raising the reserve requirement on deposit liabilities by two percentage points to 18 percent on January 1, 2012.
    - Raising its policy rate by 150 basis points to 5.75 percent on January 1, 2012.
  - Money growth declined amid a weak balance of payments.
  - The real effective exchange rate (REER) remains broadly in line with fundamentals; staff assessment indicates the escudo is modestly undervalued with mixed confidence intervals:
    - ERER misalignment: -9.6 percent (90 percent confidence interval: -27.8, 20.9)
    - MB misalignment: -4.2 percent (90 percent confidence interval: -25.7, 17.3)
    - ES misalignment: -0.2 percent
- External sector and reserves
  - The balance of payments turned sharply negative in 2011; the deficit was estimated at about 37 million euros.
  - Reserve coverage is estimated to have ended the year at 3 months of imports.
  - Higher food and fuel prices accounted for 34 million euros of the gap compared to earlier estimates; lower current transfers accounted for 13 million euros; and lower foreign direct investment accounted for 21 million euros.
- Financial sector
  - Financial soundness indicators are generally favorable though nonperforming loans have increased but remain modest.
  - Key vulnerabilities: rising construction and real estate-related loan impairment; slowing growth of emigrant deposits; shifting portfolio choices of large domestic depositors; transition in ownership and role of the offshore sector.
- Fiscal developments
  - The 2011 fiscal deficit was below the budget. Tax revenues held up well, but there were shortfalls in nontax revenue and capital transfers.
  - Spending execution was held below budget to offset lower revenues and reduce domestic borrowing to help monetary adjustment.
- Risks and policy needs
  - Near-term outlook is fraught with risks from euro area financial stress and possible recession.
  - Authorities need to contain credit expansion and minimize domestic budget financing until import growth slows and the balance of payments improves.
  - Reserves at three months of import coverage are relatively low given Cape Verde’s exposed position and exchange rate peg.
  - Enhanced monetary and fiscal policy coordination is needed to balance fiscal restraint and interest rate increases while rebuilding reserves.

### III. Program Performance
- Overall assessment
  - Program performance under the 15-month PSI was mixed; two of eight quantitative assessment criteria for end-September 2011 were missed (BCV NDA and NIR).
  - The first review in July 2011 granted waivers for the missed assessment criteria because factors were seen as temporary and minor.
- Drivers of missed targets
  - Significant external shocks: food and fuel price increases and euro area financial disarray led to a weak balance of payments and an unwinding of central bank bills.
  - Delays in receipt of foreign assistance for infrastructure spending put pressure on reserves and ran down government deposits in the BCV.
  - End-September BCV NDA and NIR targets were missed by margins of 2.0 and 4.1 percent of GDP, respectively.
- Authorities’ corrective actions and outcomes
  - By end-December 2011 authorities tightened fiscal and monetary stances:
    - Government reduced spending well below budgeted amounts while preserving the social safety net.
    - BCV extended reserve requirements and restarted regular open market operations.
  - These measures reduced BCV NDA growth by end-December to close about two-thirds of the gap with the missed end-September NDA target.
  - The BCV made significant progress on reversing reserve losses, ending the year with a reserve loss of about one-half of a month of import coverage.
- Structural benchmarks
  - Authorities met or made substantial progress on all seven structural benchmarks; five benchmarks were met (some after the end-September deadline).
  - Achievements included:
    - Memoranda signed on monetary and fiscal cooperation and on establishing a financial stability committee.
    - Treasury development of fungible bonds and extension of contingent liabilities reporting for state-owned enterprises to encompass cross-enterprise debt.
    - Completion of a medium-term debt strategy (MTDS).
  - Two outstanding benchmarks for submission to parliament of the financial system and tax laws are being redrafted with IMF assistance and expected to be submitted in early 2012.

### IV. Policy Discussions
- Fiscal and monetary stance
  - Authorities agreed it is essential to sustain tightened fiscal and monetary stances to rebuild reserves and slow debt accumulation.
  - In January 2012 the BCV raised reserve requirements and increased the intervention interest rate to sustain reserve rebuilding.
- Fiscal policy and debt outlook
  - Authorities are sustaining a tighter fiscal stance in 2012 and pursuing a medium-term scenario of gradual deficit reduction.
  - After adoption of the 2012 budget, authorities agreed to contain spending, including fiscal transfers, and net domestic borrowing to a minimal level in the first half of 2012.
  - Staff projects a peaking and then gradual reduction of debt ratios over the medium term, broadly aligned with government plans though staff preferred a faster debt reduction.
  - Revenues as a percent of GDP are projected to fall owing to a decline of official grants, partly offset by higher own revenues as tax reforms are implemented in 2013.
  - The government is expected to continue tight control of current expenditures.
- Public sector consolidation and social security
  - Mission progressed on developing a consolidated view of the government, including the social security fund, parastatals, and local governments.
  - The social security fund has a surplus of about 2–3 percent of GDP per year and accumulated significant assets mostly in bank deposits and government securities.
  - Authorities agreed on the need for a proper framework for managing and valuing the social security fund’s assets.
  - Staff recommends amending tax law to eliminate loopholes that encourage inefficient shifting of money between the fund and commercial banks.
  - Staff encourages reducing the fund’s tax rate on wage income and restructuring benefits to ensure long-term fiscal solvency.
  - Local government deficit appears modest; authorities are working toward consolidating the broader public sector.
- State-owned enterprise reform
  - Progress on SOE reform has been modest. Staff urged redoubled efforts on reforming Electra (electricity and water) and TACV (national airline) with the idea of eventual privatization.
  - It is essential that unit costs of electricity and water fall to more competitive levels.

### V. Staff Appraisal
- The text does not include the Staff Appraisal content beyond the heading in the supplied material.

*Source: Executive Summary of IMF staff report (cr1229).*

### 16. Cape Verde’s public debt remains sustainable, but a worsening global

### Cape Verde’s public debt remains sustainable, but a worsening global environment has accentuated macroeconomic vulnerabilities

### Debt sustainability and external vulnerabilities
- Staff’s debt sustainability analysis suggests that the public debt burden remains sustainable.
- Exogenous shocks could cause some debt indicators to breach thresholds.
- A particular concern is the relatively high level of private sector external debt, facilitated by Cape Verde’s peg.
- The MTDS supports continuation of the present financing strategy while flagging the importance of improving domestic debt markets as access to concessional foreign financing declines.
- The mission encouraged the authorities to apply the technical capacity built during the MTDS to strengthen debt management analysis.

### Fiscal deficit trajectory and public investment borrowing
- Staff emphasized the importance of reducing more quickly the fiscal deficit trajectory by reducing public investment borrowing and strengthening own revenues.
- A key objective for renewed PSI engagement would be reducing the fiscal deficit trajectory to ensure that the debt to GDP ratio begins to decline by 2013 or 2014.
- While the scaling up of infrastructure spending was agreed in the PSI programs, the worsened external environment gives cause to bring down the debt to GDP ratio more quickly than had been envisioned.

### Reserve accumulation and balance-of-payments resilience
- The relatively modest goal of the concluding PSI for accumulation of reserves would need to be strengthened to at least four months of import coverage by the end of a new PSI.
- The authorities were urged to redouble their commitment to raising reserve coverage to safeguard the peg.
- The staff noted a significant weakening of Cape Verde’s balance of payments in 2011 in the face of two external shocks and that the authorities’ response was delayed.

### Fiscal and monetary policy recommendations
- Staff welcomes the authorities’ tightening of the fiscal stance and intention to adhere to a tight stance in 2012.
- In the short-term, reducing net domestic financing of the budget will lessen pressure on the balance of payments and leave room for private sector credit growth.
- In the medium-term, the authorities should significantly scale back the overall fiscal deficit to bolster medium-term sustainability, in view of slower domestic growth and debt rollover risk when concessional debt comes due.
- It is essential that the authorities broaden the tax base and sustain efforts to control current expenditures.
- A tightened monetary policy stance should help to stabilize reserve coverage.
- Authorities should strive to leave room for credit to the private sector, even within a constrained external and domestic financial environment.
- Improved coordination between fiscal and monetary policies will lessen the costs of liquidity management.

### Financial sector supervision and stability
- In view of increasing financial sector vulnerabilities, the authorities agreed on the importance of continuing to strengthen banking supervision in both onshore and offshore sectors.
- The authorities indicated their intention to use the new financial framework and banks laws to continue strengthening financial supervision and, with the establishment of a financial stability committee, mitigate financial sector risks.
- Staff welcomes the completion of the financial stability committee framework and encourages its speedy implementation and the completion of updated financial system legislation.
- The authorities should continue strengthening supervision of the financial system, with development partner assistance.
- Supervision of both the onshore and offshore financial sectors will need to be especially vigilant in the period ahead.

### Growth, inclusiveness, and structural reforms
- Growth needs to be more inclusive: Cape Verde has a double-digit unemployment rate that has shown no substantial improvement over the last decade despite strong growth performance.
- Authorities are committed to diversifying economic activity, which should lead to new job opportunities.
- Efforts to align labor market incentives and skills supply are important to improve growth inclusiveness.
- The social safety net in place provides good protection to the poor and vulnerable.
- The authorities should press ahead with restructuring state-owned enterprises.
- Cape Verde’s growth prospects depend on sustaining economic competitiveness, especially in the tourist sector.
- Reduced costs and better access to key utilities and an improved quality and flexibility of the labor force are essential.

*IMF staff appraisal and mission findings as presented in the source chapter*

### 25. Staff recommends the completion of the PSI second review and granting of

### _cr1229 - 25. Staff recommends the completion of the PSI second review and granting of

### Staff recommendation and program status
- Staff recommends the completion of the PSI second review and granting of waivers for the nonobservance of end-September targets on the BCV’s NDA and NIR.
- Authorities’ corrective actions to tighten fiscal and monetary stances have:
  - Started to rebuild reserves.
  - Brought domestic credit growth close to program objectives by end-December 2011.
- Authorities completed or are soon to complete all structural benchmarks.

### Key macroeconomic projections (selected series from Table 1)
- Real GDP: 3.7 (2009), 5.4 (2010), 5.0 (2011), 5.1 (2012), 5.2 (2013), 5.3 (2014), 5.4 (2015), 5.5 (2016)
- Real GDP per capita: 2.3 (2009), 3.9 (2010), 3.6 (2011), 3.7 (2012), 3.8 (2013), 3.9 (2014), 4.0 (2015), 4.0 (2016)
- GDP deflator: 4.2 (2009), 3.3 (2010), 3.9 (2011), 3.4 (2012), 2.9 (2013), 2.9 (2014), 2.8 (2015), 2.7 (2016)
- Consumer price index (annual average): 1.0 (2009), 2.1 (2010), 4.6 (2011), 3.2 (2012), 2.8 (2013), 2.1 (2014), 2.0 (2015), 2.0 (2016)
- Exports of goods and services: -15.1 (2009), 17.7 (2010), 19.6 (2011), 11.1 (2012), 11.3 (2013), 10.4 (2014), 9.4 (2015), 8.7 (2016)
- Imports of goods and services: -6.3 (2009), 7.4 (2010), 18.1 (2011), 3.2 (2012), 7.6 (2013), 8.1 (2014), 6.2 (2015), 6.3 (2016)

### Monetary and balance-sheet indicators (selected)
- Net foreign assets (percent change): -1.5 (2009), 0.9 (2010), -2.7 (2011), 2.0 (2012), 5.3 (2013), 3.6 (2014), 2.0 (2015), 3.5 (2016)
- Net domestic assets (percent change): 5.0 (2009), 5.3 (2010), -4.2 (2011), 4.0 (2012), 1.2 (2013), 3.1 (2014), 4.9 (2015), 3.6 (2016)
- Credit to the economy (percent change): 8.0 (2009), 6.7 (2010), -5.0 (2011), 4.5 (2012), 1.2 (2013), 3.7 (2014), 5.0 (2015), 5.0 (2016)
- Broad money (M2, percent change): 3.5 (2009), 6.2 (2010), -6.9 (2011), 6.0 (2012), 6.5 (2013), 6.7 (2014), 6.9 (2015), 7.1 (2016)
- Reserve money (M0, percent change): 0.9 (2009), -0.9 (2010), -2.0 (2011), 1.4 (2012), 1.5 (2013), 1.5 (2014), 1.6 (2015), 1.6 (2016)

### External sector and reserves (selected)
- External current account (excluding official transfers, percent of GDP): -21.1 (2009), -18.8 (2010), -20.3 (2011), -14.8 (2012), -13.5 (2013), -12.8 (2014), -11.1 (2015), -9.9 (2016)
- External current account (including official transfers, percent of GDP): -15.6 (2009), -12.4 (2010), -15.1 (2011), -12.3 (2012), -10.2 (2013), -9.3 (2014), -8.2 (2015), -6.9 (2016)
- Gross international reserves (months of prospective imports of goods and services): 3.9 (2009), 3.6 (2010), 3.0 (2011), 3.0 (2012), 3.3 (2013), 3.5 (2014), 3.5 (2015), 3.7 (2016)
- Gross international reserves (millions of euros, memorandum): 275.4 (2009), 294.6 (2010), 258.0 (2011), 274.8 (2012), 326.3 (2013), 364.2 (2014), 391.3 (2015), 442.7 (2016)

### Fiscal outcomes and projections (selected from Tables 5a/5b)
- Revenue (millions of Cape Verde escudos): 36,540 (2010), 38,695 (2011), 43,735 (2012), 41,705 (2013), 40,737 (2014), 18,919 (H1 2015), projections through 2016 up to 61,634
- Domestic revenue (millions): 29,690 (2010), 30,033 (2011), 35,157 (2012), 33,856 (2013), 36,709 (2014)
- Tax revenue (millions): 25,676 (2010), 26,391 (2011), 29,915 (2012), 29,864 (2013), 32,092 (2014)
  - Income and profit taxes: 8,059 (2010), 7,865 (2011), 8,906 (2012), 9,126 (2013), 9,698 (2014)
  - Consumption taxes: 11,300 (2010), 12,221 (2011), 13,944 (2012), 13,814 (2013), 15,421 (2014)
  - International trade taxes: 5,219 (2010), 5,388 (2011), 5,927 (2012), 5,921 (2013), 5,927 (2014)
- External grants (millions): 6,850 (2010), 8,662 (2011), 8,578 (2012), 7,849 (2013), 4,028 (2014)
- Expenditure (millions): 44,493 (2010), 53,366 (2011), 59,261 (2012), 56,713 (2013), 57,037 (2014)
- Overall balance, including grants (millions): -7,953 (2010), -14,671 (2011), -15,526 (2012), -15,008 (2013), -16,300 (2014)
- Nominal GDP (memorandum): 127,069 (2010), 138,355 (2011), 151,049 (2012), projections through 226,059 (2016)
- External debt (millions, selected): 58,822 (2010), 71,032 (2011), 81,983 (2012), 97,027 (2013), 114,771 (2014)
- Domestic debt (millions, net of deposits): 20,830 (2010), 22,503 (2011), 25,292 (2012), 28,083 (2013), 28,603 (2014)
- Total debt (millions): 79,653 (2010), 93,535 (2011), 107,275 (2012), 125,111 (2013), 143,374 (2014)

### Monetary developments and banking liquidity (text, figures, and monetary survey)
- Net foreign assets declined significantly in the first half of 2011 but started to rebound in late 2011.
- Growth of credit to the private sector:
  - Stabilized in 2010 and first 10 months of 2011.
  - Started to decline significantly in late 2011.
- Growth rates of broad money and reserve money declined significantly in 2011.
- The central bank raised its policy rate in January 2012 for the first time since 2009.
- Excess reserves have been declining (excess reserves defined in source).

### External sector developments (figures and BOP table highlights)
- Trade deficit mainly driven by goods imports; service receipts and current transfers help offset negative trade balance.
- Concessional loans continue to support the current account; foreign direct investment weakened in 2011.
- Selected Balance of Payments items (millions of euros, Table 3):
  - Current account balance (including official transfers): -180 (2010), -156 (2011), projection -207 (2012)
  - Trade balance: -487 (2010), -513 (2011), -619 (2012)
  - Services (net): 115 (2010), 155 (2011), 204 (2012)
  - Current transfers (net): 223 (2010), 257 (2011), 257 (2012)
  - Capital and financial account (net): 182 (2010), 237 (2011), 177 (2012)
  - Gross international reserves (millions of euros): 275 (2010), 295 (2011), 258 (2012), projections thereafter

### Financial sector soundness (Table 4, end-year indicators)
- Regulatory capital to risk-weighted assets: 12.1 (2005), 11.1 (2006), 14.1 (2007), 12.0 (2008), 11.4 (2009), 15.6 (2010), 14.5 (Sep-11)
- Regulatory tier 1 capital to risk-weighted assets: 13.4 (2005), 11.3 (2006), 11.8 (2007), 11.5 (2008), 11.2 (2009), 14.4 (2010), 13.5 (Sep-11)
- Nonperforming loans to total loans: 6.3 (2005), 3.9 (2006), 13.5 (2007), 10.0 (2008), 3.9 (2009), 4.0 (2010), 6.9 (Sep-11)
- Return on assets: 0.5 (2005), 1.1 (2006), 1.6 (2007), 1.0 (2008), 0.7 (2009), 0.7 (2010), 0.4 (Sep-11)
- Liquid assets to total assets: 46.2 (2005), 18.3 (2006), 17.7 (2007), 16.6 (2008), 16.4 (2009), 12.5 (2010), 13.6 (Sep-11)

### Program performance indicators and targets (Table 6 and monitoring)
- Program quantitative targets (cumulative flows from end-Dec 2010, selected):
  - Net domestic borrowing of the central government, ceiling: various assessments and adjusted targets shown; notable actual gaps reported for end-September and end-December 2011.
  - Net domestic assets of the central bank, ceiling: adjusted assessments and actuals indicate nonobservance for some dates (see table for detailed millions-of-US-dollar and millions-of-euro entries).
  - Net international reserves, floor: assessment and adjusted targets show shortfalls (e.g., end-September: Assessment 4.0; Actual -66.1; Gap -70.1).
- Indicative target:
  - Regulatory capital ratio of individual banks, floor: target 10.0; actuals reported (e.g., 15.3 and 14.5 at certain assessment dates).

### Structural benchmarks (Table 7)
- Strengthen securities market:
  - Issue fungible treasury bonds with common face and coupon values and dates of payments. Timing: end-June 2011. Status: Met.
- Strengthen tax base:
  - Submit the draft individual and corporate income tax bills to the National Assembly. Timing: end-June 2011. Status: Not met.
- Promote fiscal accountability:
  - Present cross debt between state-owned enterprises in the contingent liabilities report and submit to the council of ministers. Timing: end-June 2011. Status: Met.
- Strengthen the financial sector:
  - The BCV and Ministry of Finance sign a memorandum of understanding to expand and formalize the standing financial stability committee at the BCV. Timing: end-September 2011. Status: Met with delay.
- Strengthen fiscal-monetary policy coordination:
  - The BCV and Ministry of Finance sign a fiscal-monetary coordination agreement. Timing: end-September 2011. Status: Met with delay.
- Strengthen debt management:
  - Create a medium-term strategy report on the debt level, composition, and desirable trend and present the report to the council of ministers. Timing: end-September 2011. Status: Met.
- Strengthen the financial sector:
  - Submit the financial framework law, which unifies the regulatory framework for onshore and offshore banks, to the National Assembly. Timing: end-December 2011. Status: Not met.

*Source: IMF staff report as provided in the supplied content.*

### APPENDIX I—LETTER OF INTENT

### APPENDIX I—LETTER OF INTENT

### Program implementation and policy stance
- Discussions for the concluding review of the Policy Support Instruments (PSI) were held in Praia during November 16–29, 2011.
- The 15-month PSI supported the government’s goals of macroeconomic stability, economic growth, and poverty reduction; the government accelerated its investment program and increased social spending.
- Adverse external environment led to a sharply weaker balance of payments; the government cut spending to contain the budget deficit and support external current account adjustment.
- The BCV has tightened its monetary policy stance since mid 2011 to protect reserves; inflation remains subdued.
- Short-term macroeconomic policy objective: stabilize reserves at around 3 months of imports.
- Medium-term fiscal policy objective: lower the deficit to safeguard debt sustainability and minimize domestic financing.
- Monetary policy objective: anchor market expectations and safeguard the peg.
- Request: completion of the second review under the PSI and waivers for the two missed end-September assessment criteria on the BCV’s NDA and NIR.
- Authorization: IMF may publish this letter of intent and the related staff report.

### Performance against quantitative assessment criteria (selected)
- All except two assessment criteria for end-September 2011 were met.
- The end-September NDA and NIR targets were missed by 2.0 percent of GDP and 4.1 percent of GDP, respectively, attributed to expansion of credit to commercial banks, running down of government deposits, and the adverse external environment.
- Corrective actions are being taken to bring the monetary program back on track.

### Structural benchmarks (status)
- Met: Issue fungible treasury bonds with common face and coupon values and dates of payments (end-June 2011).
- Not met: Submit the draft individual and corporate income tax bills to the National Assembly (end-June 2011).
- Met: Present cross debt between state-owned enterprises in the contingent liabilities report and submit to the council of ministers (end-June 2011).
- Met with delay: BCV and Ministry of Finance sign memorandum to expand and formalize the standing financial stability committee at the BCV (end-September 2011).
- Met with delay: BCV and Ministry of Finance sign a fiscal-monetary coordination agreement (end-September 2011).
- Met: Create a medium-term strategy report on the debt level, composition, and desirable trend and present to the council of ministers (end-September 2011).
- Not met: Submit the financial framework law, which unifies the regulatory framework for onshore and offshore banks, to the National Assembly (end-December 2011).

### Key quantitative program figures (as reported)
- Net domestic borrowing of the central government: assessment/adjusted/actual values recorded in the program tables (see source for full table).
- Net domestic assets of the central bank: assessment/adjusted/actual values recorded in the program tables (see source for full table).
- Nonaccumulation of new domestic arrears: 0.0 (continuous).
- Nonaccumulation of new external arrears: 0.0 (continuous).
- Ceiling on contracting or guaranteeing nonconcessional external debt with original maturity > one year: 35.0 (program ceiling).
- Net international reserves, floor: program tables and cumulative flows indicate large residuals related to reserve losses in 2011 (see source for full table).
- Indicative target—Regulatory capital ratio of individual banks, floor: 10.0 percent (program floor); reported values exceeded this in assessments.

### Debt sustainability and macro-fiscal outlook (DSA summary)
- Public debt increased in 2010 to 74.9 percent of GDP from 68.8 percent in 2009, reflecting a high level of public investment.
- Public investment increased to 18.7 percent of GDP in 2010 from 14.0 percent in 2009.
- Total revenue worsened by around one percentage point of GDP during the period; government current expenditures were reduced, more than offsetting revenue shortfalls.
- External public debt reached 51.3 percent of GDP in 2010.
- External public debt profile: mostly concessional; long maturity profile; low average interest rate; over 95.0 percent contracted at a fixed rate.
- Currency sensitivity: U.S. dollar corresponds to 41.9 percent of the SDR valuation basket; approximately 30.0 percent of the external debt stock is sensitive to the U.S. dollar-euro exchange rate fluctuations.
- External private debt estimate: 20 percent of GDP at end-2010; about 70 percent of this total corresponded to nonbank debt.
- Domestic debt: central government domestic debt remained at 23.5 percent of GDP between 2009 and 2010.
- National Pension Fund (INPS) holdings: held approximately 35.0 percent of government domestic debt as of December 2009.
- INPS financial assets: estimated 18.1 percent of GDP at end-2009.
- Guaranteed domestic debt of state-owned enterprises and municipalities: estimated 4.3 percent of GDP at end-2010.
- Average interest rate on domestic debt: around 5.3 percent.
- Average maturity of domestic debt: 7 years.
- Consolidated perspective: staff estimates that INPS financial assets appear larger than liabilities of state-owned enterprises and local governments, implying overall public sector consolidation points to a lower level of debt than central government alone (data limitations noted).

### Baseline macroeconomic assumptions and projections (selected)
- Growth and fiscal assumptions (Text Table):
  - GDP growth (percent)
    - Updated DSA 2011–15: 5.2
    - Previous DSA 2011–15: 6.7
    - Updated DSA 2016–31: 5.5
    - Previous DSA 2016–31: 5.0
    - Updated DSA 2011–31: 5.5
    - Previous DSA 2011–31: 5.4
  - Fiscal balance (percent of GDP)
    - Updated DSA 2011–15: -7.7
    - Previous DSA 2011–15: -5.6
    - Updated DSA 2016–31: -3.3
    - Previous DSA 2016–31: -2.5
    - Updated DSA 2011–31: -4.3
    - Previous DSA 2011–31: -3.3
- Near-term growth outlook worsened due to protracted external adjustment in Europe; near-term growth projected to remain below the 2000–2010 annual average of 6.2 percent.
- Main transmission channels of external uncertainty: foreign direct investment inflows and real estate sector weaknesses.
- Public investment program: almost half of public capital spending in energy, water, and transportation; program includes social components and sector-specific competitiveness interventions.
- Baseline conditionality:
  - Government committed to low domestic financing; expected continued control of fast-growing current expenditures and progress on tax policy reforms.
  - Investment financing assumed with relatively little recourse to domestic sources to support the exchange rate peg.
  - Monetary policy assumed to react promptly to stabilize reserves; central bank assumed to tighten to rein in domestic credit growth when necessary.
- Reserve coverage: projected to average 3.0 months of prospective imports between 2011 and 2015 (previous DSA projection: 4.1 months for the same period).
- Baseline DSA outcome: deterioration of the external debt outlook in the next five years followed by gradual improvement; the PV of external public debt-to-GDP approaches the policy-dependent threshold in 2016 but there is no significant or protracted breach of external debt indicators through 2031. PV of debt-to-exports and PV of debt-to-revenue remain well below thresholds, reflecting concessionality of debt.

*Source: APPENDIX I—LETTER OF INTENT (January 5, 2012) and accompanying DSA material in the provided PDF.*

### Box 1.   Macroeconomic Assumptions for the Baseline Scenario

### Box 1.   Macroeconomic Assumptions for the Baseline Scenario

### Overview
- Real GDP growth: solid recovery from the 2008 global crisis; resilient until the first half of 2011, when growth started to slow reflecting the troubled external environment. Medium-term outlook is weaker.
- Long-term growth prospects: favorable, underpinned by a dynamic tourism sector and infrastructure investment.
- Inflation: assumed to remain anchored to international levels given the peg to the euro, but influenced by external volatility.
- Adjustment mechanisms: wage moderation and price flexibility, particularly in the tourism sector, will continue to facilitate adjustment to shocks.

### External sector assumptions and projections
- Current account: projected to remain negative during the DSA horizon due to structural dependence on imports, but improve over time as exports become more diversified and import shares decline.
- Current transfers: as a percent of GDP are expected to slowly decline as official grants are phased out and the domestic economy gradually outgrows remittance inflows.
- Capital account flows: expected to be modestly lower, particularly as the temporary increase in official disbursements to finance the public investment program comes to an end.
- Financing composition: concessionality of new external loans will decline significantly in the medium term; baseline assumes this will happen around 2018–20 when concessional loans contracted up until 2013–15 should be close to full disbursement.
- Domestic borrowing: baseline assumes authorities will continue to keep domestic borrowing low to support the peg.

### Fiscal assumptions and projections
- Overall fiscal balance: projected to improve but remains a concern.
- Fiscal deficit: after peaking in 2010 at double-digits, projected to decline and settle at an annual average of 3.3 percent in 2016-31.
- Tax revenue: expected to increase by about 4 percentage points of GDP over the DSA horizon due to tax reforms and broadening of the tax base.
- External grants: will decline over time, broadly offsetting tax revenue gains.
- Current expenditure: expected to grow in line with nominal GDP.
- Capital expenditure: projected to reduce from 18.7 percent of GDP in 2010 to less than 10.0 percent of GDP in the outer years.

### Baseline public debt projections
- Total public debt: reaches high levels and mirrors external debt dynamics.
- Domestic debt: projected to remain manageable and decline gradually over the medium term to support the exchange rate regime; for the longer term, projected to pick up slightly but remain below 20.0 percent of GDP as reliance on external financing declines.
- Public debt to GDP: rises to high levels owing to large foreign-financed fiscal deficits, peaking at 87.4 percent in 2014.

### Alternative scenarios and stress tests — external debt
- General finding: PV of external debt-to-GDP breaches relevant thresholds under different stress tests, indicating vulnerability to large shocks and a deteriorated economic environment.
- Largest impact: exchange rate shock causes the largest and most protracted breach (a one-time 30 percent nominal depreciation relative to the baseline in 2012 is assumed).
- Other shocks: the export shock and the U.S. dollar GDP deflator shock also lead to breaches, though much less pronounced (export value growth at historical average minus one standard deviation in 2012–13; U.S. dollar GDP deflator at historical average minus one standard deviation in 2012–13).
- Less favorable loan terms: under the assumption that new public sector loans are made on less favorable terms, the PV of external debt-to-GDP suffers a protracted breach of the relevant threshold.
- Debt-to-exports and debt-to-revenue: stress tests and less favorable assumptions do not imply any breach of the relevant thresholds for the PV of debt-to-exports and the PV of debt-to-revenue.

### Tail risk scenario (severe external disruption)
- Scenario assumptions simulated by staff:
  - (i) growth and foreign direct investment fall by 50.0 percent from their baseline projections for each year from 2012 to 2014;
  - (ii) exports as a percentage of GDP fall by 10.0 percent from its baseline projection for each year from 2012 to 2014;
  - (iii) the interest rate on the marginal external debt needed to finance the balance of payments reaches five percent with a grace period of two years.
- Results: margin of comfort for some debt indicators under the baseline can be quickly eroded in this situation.
- Additional vulnerability: private sector external debt represents another source of vulnerability in such an extreme scenario given potential higher interest costs associated with a higher country risk premium.

### Contingent liabilities and fiscal risks
- State-owned enterprises (SOEs): contingent liabilities associated with guaranteed and non-guaranteed debt reached 11.5 percent of GDP in 2010 for the selected companies covered in the government report.
- Coverage: report covers six public companies; government holds a controlling stake in 13 financial and non-financial companies (more than 50.0 percent). Improving coverage is important to provide a more comprehensive assessment of risks.
- Specific SOE risks: TACV and Electra represent a high fiscal risk to the budget; both regularly need short-term credit facilities and resort to government guarantees. Updated financial information on TACV is lacking, which limits analysis.
- External support: international community providing support for restructuring; World Bank expected to approve in 2012 a large energy loan to Electra (US$60 million) and is also engaged with TACV.

### Public debt stress scenarios and fiscal policy sensitivity
- Alternative scenario of unchanged primary balance from 2011: leads to clearly unsustainable debt dynamics (but judged not likely because scale-up of capital spending is expected to be temporary).
- Fiscal deterioration scenario simulated:
  - (i) domestic revenue as a percent of GDP remains stagnant at the 2011 level;
  - (ii) current expenditure as a percent of GDP grows five percent faster than in the baseline projection for every year.
- Result: simulations indicate the critical importance of implementing long-standing tax policy reforms and controlling growth of current expenditures.

### Conclusions and policy recommendations
- Staff assessment: Cape Verde’s debt is sustainable; debt indicators are projected to improve as the public investment program winds down. Long maturities and high concessionality of existing debt mitigate rollover risks for now.
- Fiscal space: domestic revenue covers current expenditure, providing some room for adjustment in case of unexpected reductions in official grants or foreign financing.
- Institutional strengths: Cape Verde enjoys strong credibility due to policies and democratic institutions and continues to galvanize support from the international community. Tourism sector resilient and competitive. International reserves are at minimally adequate levels and authorities committed to protecting the peg.
- Risks and recommended actions:
  - Faster accumulation of external public debt in an uncertain global environment has increased risks around the baseline.
  - Authorities should seek faster debt reduction through moderation of the public investment pace, particularly domestically financed investment.
  - Postponing new foreign-financed investments, especially those assessed to have more indefinite returns to the private sector, would be prudent.
  - Such a strategy would help promote external balance and shore up international reserves by containing growth of the import bill during uncertain times.
  - Regarding debt management, authorities should prioritize development of analytical capacity in the Ministry of Finance to inform policymakers of risks around the baseline.

*Source: IMF staff Box 1, "Macroeconomic Assumptions for the Baseline Scenario" (from the provided PDF content).*

### 21.      The authorities view the rapid build-up of public debt as necessary to promote

### _cr1229 - 21.      The authorities view the rapid build-up of public debt as necessary to promote

### Authorities' rationale
- The authorities view the rapid build-up of public debt as necessary to promote the country’s development as a middle-income economy and to create the foundations for economic diversification through public infrastructure investment.
- They characterize the temporary availability of concessional funds as a unique opportunity that cannot be missed.

### Staff assessment and policy guidance
- Staff understands the government’s rationale but advises greater caution:
  - Public investment should be predicated on more conservative assumptions about the benefits of this investment.
  - Investment plans should be adjusted to match new external risk conditions and actual progress on structural reforms.
- Structural reforms identified as needed (noted slow progress): tax policy, revenue administration, state-owned enterprise restructuring (particularly of Electra and TACV), labor market flexibility, public investment management, and financial sector legislation.

### Key quantitative debt indicators (select)
- External debt (nominal) 1/: 68.1; 68.4; 70.8; 70.4; 72.5; 75.1; 75.8; 74.6; 73.4; 59.2; 35.5
- o/w public and publicly guaranteed (PPG) external debt: 44.9; 46.3; 51.3; 54.3; 59.1; 64.6; 68.1; 68.1; 68.1; 55.4; 33.6
- Change in external debt: -5.6; 0.3; 2.3; -0.4; 2.2; 2.5; 0.7; -1.2; -1.2; -3.2; -1.8
- Identified net debt-creating flows: -8.8; 6.7; 3.2; 7.9; 3.6; 1.6; 0.8; -0.1; -1.1; -1.8; 0.4
- Net FDI (negative = inflow): -13.4; -7.5; -6.7; -8.0; 3.7; -4.1; -5.4; -5.1; -4.8; -4.5; -4.2; -4.1; -4.1; -4.1
- Endogenous debt dynamics 2/: -8.9; 0.4; -0.6; -1.1; -1.3; -1.5; -1.6; -1.8; -1.8; -1.3; -0.3
- PV of external debt 4/: 55.2; 54.3; 55.2; 56.4; 56.4; 55.6; 55.0; 48.0; 31.7
- PV of PPG external debt: 35.8; 38.2; 41.8; 45.9; 48.7; 49.2; 49.7; 44.2; 29.8
- PV of PPG external debt (in percent of exports): 93.0; 90.6; 96.9; 103.6; 107.7; 107.8; 108.6; 97.8; 74.5
- PV of PPG external debt (in percent of government revenues): 165.0; 170.4; 186.8; 199.7; 208.3; 206.4; 204.9; 178.7; 114.1
- Debt service-to-exports ratio (in percent): 8.5; 9.4; 8.3; 7.9; 7.4; 6.8; 6.8; 6.5; 6.2; 8.0; 9.2
- PPG debt service-to-exports ratio (in percent): 4.6; 5.6; 4.7; 4.8; 4.4; 4.0; 4.2; 3.9; 3.7; 5.9; 7.5
- PPG debt service-to-revenue ratio (in percent): 7.5; 8.5; 8.4; 9.0; 8.5; 7.8; 8.1; 7.5; 7.0; 10.7; 11.5
- Total gross financing need (Billions of U.S. dollars): 0.1; 0.2; 0.1; 0.2; 0.2; 0.1; 0.1; 0.1; 0.1; 0.1; 0.4
- Non-interest current account deficit that stabilizes debt ratio: 19.0; 13.5; 8.2; 13.5; 8.1; 5.6; 6.5; 7.4; 6.2; 6.8; 6.6

### Public sector debt (selected)
- Public sector debt 1/: 67.9; 68.8; 74.9; 77.7; 82.1; 85.8; 87.4; 84.8; 82.3; 67.1; 49.5
- o/w foreign-currency denominated: 44.9; 46.3; 51.3; 54.3; 59.1; 64.6; 68.1; 68.1; 68.1; 55.4; 33.6
- Change in public sector debt: -6.0; 0.9; 6.0; 2.8; 4.4; 3.7; 1.6; -2.6; -2.5; -2.4; -1.7
- Identified debt-creating flows: -2.9; -1.5; 9.3; 0.3; 2.9; 3.2; 1.6; -2.5; -2.9; -2.4; -1.7
- Primary deficit: -0.3; 4.8; 9.0; 3.3; 3.0; 8.1; 6.6; 7.0; 5.6; 1.9; 1.4; 5.1; 1.4; 0.4; 1.2
- Revenue and grants (in percent of GDP): 33.3; 28.8; 28.0; 27.6; 24.8; 26.4; 26.9; 26.8; 27.3; 26.4; 26.6
- Grants (in percent of GDP): 5.5; 5.4; 6.3; 5.2; 2.5; 3.4; 3.5; 3.0; 3.0; 1.6; 0.5
- Primary (noninterest) expenditure (in percent of GDP): 33.0; 33.5; 37.0; 35.7; 31.4; 33.3; 32.5; 28.7; 28.6; 27.7; 27.1
- Automatic debt dynamics: -1.9; -6.4; 0.4; -7.7; -3.7; -3.9; -4.1; -4.4; -4.4; -3.8; -2.1
- PV of public sector debt: 59.4; 61.6; 64.7; 67.1; 68.0; 65.9; 64.0; 55.9; 45.8
- o/w foreign-currency denominated (PV): 35.8; 38.2; 41.8; 45.9; 48.7; 49.2; 49.7; 44.2; 29.8
- Gross financing need 2/: 2.9; 7.8; 11.9; 11.3; 9.7; 9.9; 8.6; 4.6; 3.9; 4.7; 4.4

### Sensitivity analysis and scenarios (summary)
- Table 2 and subsequent figures present alternative scenarios and bound tests for 2011-2031, including:
  - A1. Key variables at their historical averages in 2011-2031.
  - A2. New public sector loans on less favorable terms in 2011-2031 (assumes interest rate on new borrowing is by 2 percentage points higher than in the baseline).
  - A3. Alternative Scenario: External tail risk.
  - B1–B6. Bound tests including shocks to real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combinations of shocks, and a one-time 30 percent nominal depreciation in 2012.
- Most extreme stresses identified for 2021 vary by indicator (e.g., one-time depreciation shock, terms shock, exports shock depending on the indicator).

### Key macroeconomic and financing assumptions (select)
- Real GDP growth (in percent): 6.2; 3.7; 5.4; 6.1; 2.0; 5.0; 5.1; 5.2; 5.3; 5.4; 5.5; 5.3; 5.5; 5.6; 5.5
- GDP deflator in US dollar terms (change in percent): 10.8; -1.4; -1.6; 5.8; 8.5; 10.7; 3.3; 2.1; 2.0; 2.8; 2.7; 3.9; 2.7; 2.8; 2.7
- Effective interest rate (percent) 5/: 3.4; 2.9; 2.8; 3.8; 0.8; 3.2; 3.1; 3.0; 3.0; 2.9; 2.9; 3.0; 3.3; 4.7; 3.7
- Growth of exports of G&S (US dollar terms, in percent): 24.6; -19.7; 12.2; 16.9; 14.8; 27.3; 11.0; 10.5; 9.5; 9.4; 8.7; 12.7; 7.9; 6.6; 7.5
- Growth of imports of G&S (US dollar terms, in percent): 18.6; -11.4; 2.3; 13.8; 13.5; 25.7; 3.1; 6.7; 7.2; 6.2; 6.3; 9.2; 7.0; 7.5; 7.5
- Grant element of new public sector borrowing (in percent): 29.9; 31.1; 31.3; 31.5; 31.9; 31.0; 31.1; 10.0; 5.5; 10.7
- Government revenues (excluding grants, in percent of GDP): 27.9; 23.4; 21.7; 22.4; 22.4; 23.0; 23.4; 23.8; 24.3; 24.7; 26.1; 25.2

### Operational implications
- Given the vulnerability revealed in several stress scenarios and the levels of PV debt-to-exports and PV debt-to-revenue ratios, staff emphasis is on:
  - Conservative assumptions for expected returns on public investment.
  - Phased or contingent public investment aligned with reform progress.
  - Accelerating identified structural reforms (tax, revenue administration, SOE restructuring, labor, PIM, financial sector) to strengthen debt sustainability.

*Sources: Country authorities; and staff estimates and projections.*

### ANNEX I—CAPE VERDE: RELATIONS WITH THE FUND

### ANNEX I—CAPE VERDE: RELATIONS WITH THE FUND (as of November 30, 2011)

### I. Membership and Legal Status
- Joined: November 20, 1978
- Article VIII

### II. General Resources Account (SDR Million; %Quota)
- Quota: 9.60 — 100.00
- Fund holdings of currency: 9.59 — 99.93
- Reserve tranche position: 0.02 — 0.17

### III. SDR Department (SDR Million; %Allocation)
- Net cumulative allocation: 9.17 — 100.00
- Holdings: 5.36 — 58.51

### IV. Outstanding Purchases and Loans (SDR Million; %Quota)
- ECF arrangements: 4.21 — 43.81

### V. Latest Financial Arrangements
- ECF (formerly PRGF):  
  - Date of Arrangement: Apr 10, 2002  
  - Expiration Date: Jul 31, 2005  
  - Amount Approved (SDR Million): 8.64  
  - Amount Drawn (SDR Million): 8.64
- Stand-By:  
  - Date of Arrangement: Feb 20, 1998  
  - Expiration Date: Mar 15, 2000  
  - Amount Approved (SDR Million): 2.50  
  - Amount Drawn (SDR Million): 0.00

### VI. Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming Principal and Charges/interest by year:
  - 2011: Principal 0.37; Charges/interest (not shown for 2011)
  - 2012: Principal 1.61; Charges/interest 0.01
  - 2013: Principal 1.24; Charges/interest 0.01
  - 2014: Principal 0.74; Charges/interest 0.01
  - 2015: Principal 0.25; Charges/interest 0.01
- Total by year (as presented):
  - 2011: Total 0.37
  - 2012: Total 1.62
  - 2013: Total 1.25
  - 2014: Total 0.75
  - 2015: Total 0.26
- 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."

### VII–VIII. Debt Relief Initiatives
- Implementation of HIPC Initiative: Not Applicable
- Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

### IX. Safeguards Assessments
- Two safeguards assessments of the Bank of Cape Verde (BCV): completed in 2002 and 2008.
- 2008 assessment (voluntary, at authorities' request, with respect to the PSI):
  - Found that BCV adopted some 2002 recommendations and made new recommendations addressing vulnerabilities notably in:
    - internal audit mechanism,
    - system of internal controls,
    - transparency practices.
  - Progress noted: improved completion of audits and publication of audited financial statements on BCV website.
  - Some safeguards recommendations remain work in progress.

### X. Exchange Arrangements
- De facto and de jure exchange rate arrangement: conventional fixed peg.
- Peg: escudo pegged to the euro at CVE 110.265 per euro since January 4, 1999.
- Accepted obligations of Article VIII effective July 1, 2004.
- Maintains an exchange system free of restrictions on payments and transfers for current international transactions.

### XI. Previous Article IV Consultation and PSI Reviews
- Executive Board concluded Article IV consultation and approved request for a PSI on July 31, 2006 (Country Report No. 06/334).
- PSI reviews and consultations timeline (selected):
  - First PSI review: January 19, 2007 (Country Report No. 07/44)
  - Second PSI review: May 7, 2007 (Country Report No. 07/223)
  - Third PSI review: December 21, 2007 (Country Report No. 08/37)
  - 2008 Article IV consultation and fourth PSI review: June 30, 2008 (Country Report No. 08/248)
  - Fifth PSI review: December 22, 2008 (Country Report No. 09/14)
  - Sixth PSI review: June 19, 2009 (Country Report No. 09/198)
  - Seventh PSI review: December 18, 2009 (Country Report No. 09/328)
  - Eighth PSI review: July 19, 2010 (Country Report No. 10/218)
  - 2010 Article IV consultation and approval of a 15-month PSI arrangement: November 2010 (Country Report No. 10/349)
  - First review under the PSI concluded on a lapse-of-time basis: July 27, 2011 (Country Report No. 11/254)

### XII. Technical Assistance (since 2004) — by Fund Department
- Fiscal Affairs Department (FAD):
  - June 2004: help move to a VAT, rationalize import tariff, overhaul domestic indirect tax system.
  - October 2004: review tax administration, including VAT implementation and help assess tax exemptions and incentives.
  - September 2005: assess tax exemptions and incentives.
  - June 2008: review and rationalize tax exemptions.
- Statistics Department (STA):
  - November 2003, January 2006: National accounts.
  - February 2004: Balance of payments statistics.
  - March 2004, April 2006, February 2007, August 2008: Government finance statistics.
  - June 2004, May 2006, October 2007: Price statistics.
  - March 2007: Monetary statistics and reporting.
- Monetary and Capital Markets (MCM):
  - April 2004: Accounting, financial sector regulation, monetary operations and liquidity management.
  - November 2005, March 2006, June 2006, November 2006, July 2007: Banking supervision, liquidity management, exchange regime and reserves management.
  - March 2008: Macro-prudential indicators.
  - November 2008, January 2009, March 2009: Financial Sector Assessment Program (FSAP) and follow-up missions on banking supervision.
  - February 2009, September 2009: Joint IMF-World Bank on debt management (DeMPA) and on Medium-Term Debt Strategy (MTDS).
  - December 2010: Liquidity management and monetary policy operations.
  - June 2011: Mid-term Debt Strategy Development Follow-up.
  - October 2011: Enhancing Banking Supervision and Crisis Resolution.
- Legal (LEG):
  - October 2006 and March 2008: Tax legislation.
  - March 2007: AML/CFT initial assessment; legal drafting on March 2008.

### XIII. Resident Representative
- None

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### Press Release No.12/28 — Executive Board Completion of Second and Final PSI Review (January 30, 2012)
- The Executive Board completed the second and final review of Cape Verde’s performance under the 15-month PSI approved in November 2010.
- Waivers of nonobservance of assessment criteria were granted.

Key statements by Ms. Nemat Shafik, Deputy Managing Director and Acting Chair:
- Authorities tightened macroeconomic policies in the second half of 2011 in response to international commodity price increases and the European debt crisis.
- Policy restraint will be needed in coming months to safeguard the exchange rate peg and build buffers against shocks given lingering global uncertainties.
- Authorities plan to reduce the budget deficit and external debt over the medium term to strengthen the fiscal position and support private sector growth by:
  - increasing domestic revenue,
  - containing current spending,
  - proceeding cautiously on capital spending,
  - relying on concessional borrowing as much as possible.
- Recent increase in the Bank of Cape Verde’s policy rate and reserve requirements for commercial banks will help contain inflation and bolster international reserves.
- Growing financial sector vulnerabilities call for further improvements in banking regulation and supervision.
- Establishment of a financial stability committee is a welcome step.
- Despite progress toward the Millennium Development Goals, unemployment remains high; this calls for:
  - reforms to enhance competitiveness,
  - economic diversification,
  - improvements in labor market functioning,
  - faster progress in restructuring state-owned enterprises.

Statement by Mr. Kossi Assimaidou, Executive Director for Cape Verde (January 30, 2012):
- The PSI aimed to consolidate macroeconomic and financial stability and support the exchange rate peg.
- The PSI sought to promote prudence in public debt and public finance management, build up international reserves, and nurture financial sector stability.
- The PSI has been instrumental in supporting the authorities’ policy and reform agenda.

### ANNEX III — Statistical Issues: Assessment and Priorities
- Overall assessment:
  - Data provision has some shortcomings but is broadly adequate for surveillance.
  - Substantial improvements needed in national accounts, financial sector, and balance of payments.
  - Cape Verde has participated in the GDDS since February 2004; monetary and financial metadata updated in August 2007.
- Capacity and resources:
  - Statistical system suffers from shortage of financial and human resources.
  - A comprehensive master plan developed under INE to upgrade agencies and broaden/improve all statistical areas.
- Real Sector Statistics:
  - Significant weaknesses remain, including a lack of reliable demand-side GDP and lengthy data lags.
  - INE released production and expenditure-based GDP data for 2005–07 in 2010; production-based GDP estimates for 2008 provided in September 2010.
  - INE receiving technical assistance from Brazil and Spain on business indicators and national accounts.
  - On May 2011, INE signed a cooperation protocol with its Spanish counterpart to enhance national accounts and produce environmental statistics.
  - INE plans to publish quarterly GDP data by 2012.
  - INE overhauling national accounts: updating benchmark and base years from 1980 to 2002 and adopting the 1993 SNA.
  - INE will introduce tourism satellite accounts to measure upstream linkages and import content of tourism exports.
  - Full implementation of 1993 SNA requires substantial improvement in source data collection; 2006 STA mission found critical need to improve timeliness and accuracy of national accounts source data, notably the business survey.
- Consumer Price Index:
  - Revamped CPI with new methodology launched February 2008.
  - Previous CPI used weights from 1989; import liberalization altered consumption patterns.
  - INE received assistance from the National Statistics Institute of Portugal and STA CPI missions in May–June 2006, October 2006, October 2007.
- Labor Market Statistics:
  - INE publishes labor market statistics only annually with long delays.
  - Recently published annual unemployment data comparable to EUROSTAT and AFRISTAT.
  - INE published 2010 census.
  - No data on wages by sector.
  - INE staff receiving training from Senegal on TFP statistics for companies with regular employees; further technical assistance needed for TFP in public administration, agriculture, and firms hiring only temporary contractors.
- Government Finance Statistics (GFS):
  - Fiscal data improved; GFS compilation system upgraded under GDDS TA.
  - Most deposits previously held with commercial banks consolidated at the central bank.
  - SIGOF expanded to cover all semi-autonomous institutes and most municipalities by end-2007.
  - Authorities have started reporting GFS for publication in the GFS Yearbook.
  - Quality concerns remain: statistical discrepancies, inconsistency between flows and stocks, delays in donor reporting affecting accuracy, weaknesses in public and publicly guaranteed debt data of state-owned enterprises.
- Monetary and Financial Statistics:
  - Adequate, but monetary survey quality could be further improved.
  - March 2007 STA mission helped BCV finalize SRFs for reporting to STA; SRF-based data published in IFS Supplement since June 2007.
  - Integrated monetary database meeting STA, AFR, and BCV needs is in place.
  - Presentation gaps between STA-generated monetary survey and BCV-produced survey exist but can be resolved in short order.
- External Sector Statistics:
  - Accuracy, periodicity, and timeliness of balance of payments statistics compiled by BCV have continued to improve.
  - Increased use of surveys and International Transactions Reporting System expanded data sources and coverage, largely following 5th edition Balance of Payments Manual recommendations.
  - Lack of data from one bank on external flows remains.
  - Quarterly BOP dissemination on BCV website regular; 2007 saw resumption of regular and timely transmission to STA for publication in IFS and BOP Yearbook.

### Common Indicators Required for Surveillance (As of December 11, 2011) — Selected Entries
- Exchange Rates: Date of Latest Observation 09/30/11; Date Received 11/06/11; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 09/30/11; Date Received 11/06/11; Frequency of Data: D; Frequency of Reporting: W; Frequency of Publication: M
- Reserve/Base Money: Date of Latest Observation 09/30/11; Date Received 11/06/11; Frequency of Data: D; Frequency of Reporting: W; Frequency of Publication: M
- Broad Money: Date of Latest Observation 09/30/11; Date Received 11/06/11; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M
- Central Bank Balance Sheet: Date of Latest Observation 09/30/11; Date Received 11/06/11; Frequency of Data: D; Frequency of Reporting: W; Frequency of Publication: M
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation 09/30/11; Date Received 11/06/11; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M
- Consumer Price Index: Date of Latest Observation 10/30/11; Date Received 11/15/11; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation 09/30/11; Date Received 09/30/11; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 09/30/11; Date Received 09/30/11; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: A
- External Current Account Balance: Date of Latest Observation 09/30/11; Date Received 11/15/11; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q
- Exports and Imports of Goods and Services: Date of Latest Observation 09/30/11; Date Received 11/15/11; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q
- GDP/GNP: Gross External Debt: Date of Latest Observation 09/30/11; Date Received 09/30/11; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: A
- International Investment Position: Date of Latest Observation 2007; Date Received Aug. 2008; Frequency: A; Frequency of Reporting: A; Frequency of Publication: A

*Source: ANNEX I—CAPE VERDE: RELATIONS WITH THE FUND (as of November 30, 2011).*

### 2. During the implementation of the successive PSIs in recent years, major strides were

### _cr1229 - 2. During the implementation of the successive PSIs in recent years, major strides were

### Progress, measurement issues, and labor market
- Major strides were made in stimulating growth and reducing poverty during the implementation of the successive PSIs.
- Cape Verde’s latest PRSP progress report and census highlight encouraging unemployment trends in recent years.
- Measuring reductions in unemployment is challenging because of:
  - a change in computational methods following the adoption of ILO measurement standards; and
  - the substantial import of labor from West African countries in recent years.

### External shocks, macroeconomic impact, and policy response
- The Cape Verdean economy faced large external shocks stemming notably from the turmoil in the euro area and increases in global food and fuel prices.
- Adverse effects included:
  - some macroeconomic fundamentals and performance under the program being adversely affected;
  - widening of the current account deficit driven by higher global food and fuel prices;
  - a notable decline in international reserves; and
  - delayed disbursement of donor assistance that aggravated reserve losses by reducing government deposits at the BCV.
- Authorities’ response:
  - Prompt policy actions on both the fiscal and monetary sides to mitigate shocks.
  - Continued vigilance and readiness to take necessary actions to cope with external shocks, given exposure to the Eurozone crisis.
  - Requesting waivers of nonobservance of end-September 2011 assessment criteria related to net domestic assets and net international reserves in view of corrective actions taken.

### Recent economic developments and program performance
- Growth:
  - Preliminary estimates suggest that growth slowed down slightly in 2011 to reach about 5 percent.
  - Tourism and public investment largely maintained their contribution to growth, but FDI declined significantly and official transfers were lower than expected.
- Inflation and external position:
  - Higher global food and fuel prices fueled inflation and contributed to widening the current account deficit.
  - The external position weakened, with a notable decline in international reserves.
- Program performance:
  - Fiscal: all quantitative targets for end-September 2011 were met.
  - Monetary: the two quantitative criteria related to net domestic assets (NDA) and net international reserves (NIR) were missed owing largely to deteriorating external conditions, particularly in the euro area.
  - Structural: program performance was strong with five out of seven benchmarks set for the review being met, including:
    - signing of memoranda on fiscal and monetary coordination and the setup of a financial stability committee;
    - establishment of a framework for the issuance of fungible treasury bonds;
    - establishment of a medium-term debt strategy; and
    - inclusion of cross-debt between state-owned enterprises in the report on contingent liabilities.
  - Work toward completing the missed structural benchmarks (submission of the draft income tax bill and new banking law to the parliament) is underway and expected to be completed early in 2012.

### Fiscal policy stance and measures
- Intentions and objectives:
  - Keep the stance of fiscal and monetary policies tight to preserve fiscal and debt sustainability and safeguard the external position.
  - Medium-term objective of containing the fiscal deficit and minimizing recourse to domestic financing.
  - Short-term plan to keep tight control over public spending.
  - Implement austerity measures in consultation with social partners to preserve social stability, sustain economic growth, and secure further progress toward poverty reduction.
- Specific fiscal actions taken in 2011:
  - Steps to significantly cut spending and sustain strong tax revenue performance.
  - Measures to increase efficiency of public administration, streamline public agencies, and ensure stricter control over the wage bill for civil servants.
  - Limited recourse to domestic budget financing.

### Monetary policy stance and measures
- Actions taken by the BCV:
  - Broadened the scope of reserve requirements in July 2011 to include government deposits.
  - Took steps to constrain growth of credit as well as reserve and broad money, notably through the resumption of open-market operations.
  - Raised the policy rate and reserve requirements on deposit liabilities (noted as occurring "earlier this month" in the report).
- Objectives:
  - Contain reserve losses and significantly curtail the growth of net domestic assets.
  - Stabilize reserve coverage at around 3 months of imports and thus protect the peg.
  - Continue a tight monetary policy stance to achieve immediate monetary policy goals.

### Coordination, financial sector oversight, and structural reforms
- Fiscal and monetary coordination:
  - Authorities will continue to attach great importance to strengthening coordination between fiscal and monetary policy, illustrated by recent concerted actions to support monetary adjustment and strengthen the external position.
- Financial sector stability:
  - In view of risks stemming from domestic and external factors, strict supervision and regulation of the financial sector will continue.
  - Ongoing efforts to strengthen the supervisory and regulatory framework for onshore and offshore banks will be pursued.
  - Adequate use will be made of the newly-established financial stability committee.
- Public accounts consolidation and SOE reform:
  - Authorities see merit in developing a consolidated view of public accounts integrating the social security fund (INPS), local administrations, and state-owned enterprises (SOEs).
  - SOE reform will be carried forward to generate efficiency gains in public administration.
  - Specific SOE actions underway or advanced:
    - Work to improve the financial situation of the electricity and water company (Electra) and airline company (TACV).
    - Substantial progress in recent months on Electra reform including:
      - adoption of an action plan for the second phase of Electra’s institutional restructuring;
      - design of a comprehensive approach to the financial reform of Electra;
      - adoption of a new regulatory tariff-adjustment model;
      - signature of a results-based management contract between Electra and the government of Cape Verde.

### Social safety net and social security fund issues
- The authorities consider the existing social safety net to provide good protection to the poor and vulnerable.
- Any proposed changes to the social safety net should be supported by comprehensive analysis to avoid jeopardizing adequacy.
- Authorities view that more work is needed before adopting staff’s proposal to reduce the social security fund’s tax rate on wage income and restructure benefits to ensure long-term fiscal solvency, expressing concern that such measures could reverse gains in poverty reduction.

### Conclusion and program endorsement
- Authorities value IMF advice received under successive PSIs and emphasize maintaining a close relationship with the IMF.
- In light of Cape Verde’s broadly satisfactory performance under the Policy Support Instrument, the staff requests Directors’ support for the conclusion of the second review of Cape Verde’s PSI program.

*Source: _cr1229 - 2. During the implementation of the successive PSIs in recent years, major strides were*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1229.pdf_