## External Stability Assessment

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---

### Developments and medium-term challenges
- Cabo Verde graduated to middle-income country status in 2007 and reduced poverty from 49 percent in 1989 to 25 percent in 2011; on track to achieve all Millennium Development Goals by 2015.
- Key medium-term challenges:
  - Large-scale Public Investment Program (PIP) beginning to wind down.
  - Tourism growth may slow as market share limits are reached.
  - Total factor productivity has fallen over the last decade, necessitating structural reforms to boost competitiveness and support job-creating, inclusive growth.
- Fiscal sustainability concern:
  - Public debt rose to 98 percent of GDP at end-2013—a rise of 40 percentage points since 2008.
  - Debt financing has been highly concessional, but risks to debt sustainability remain if fiscal consolidation stalls.

### Current conditions (2013) — growth, labor, prices, external sector, fiscal
- Growth and labor market:
  - Real GDP growth: 0.5 percent for 2013 (down from 1.2 percent in 2012 and 4 percent in 2011).
  - Tourism accounts for about a fifth of the economy.
  - Credit to the economy grew by only 1 percent in 2013.
  - Unemployment: 16½ percent at end-2013 (about the same as in 2012; up from 12 percent in 2011); youth unemployment about double that rate.
  - Average inflation: 1½ percent.
- External sector and reserves:
  - Current account deficit narrowed to about 4½ percent of GDP in 2013.
  - International reserves recovered to about 4½ months of prospective imports.
- Fiscal outturn and budget reprogramming:
  - Total revenue increased by about ¾ percentage point of GDP relative to original budget.
  - Tax revenue edged down about ¼ percentage point of GDP; grants increased by ½ percentage point; other non-tax revenue increased by ½ percentage point.
  - Current expenditure reduced by 1½ percentage points of GDP relative to budget.
  - Public investment (including onlending) reduced by 4 percentage points of GDP relative to budget.
  - Fiscal deficit fell by about 2 percentage points of GDP to 7¾ percent; total financing including onlending was 13.2 percent of GDP.
- Monetary and liquidity conditions:
  - Since May 2013, rates on central bank bills and short-term government securities fell below 1 percent, below the 5.75 percent policy rate.
  - Excess liquidity built up in banks with limited credit growth; deposit rates remained relatively high due to competition for emigrant funds; loan rates remained high due to bank risk aversion and high NPLs.
- Financial stability and banking sector:
  - NPL ratio peaked at 20 percent in September 2013, eased to 16 percent by December 2013.
  - Banking system capital adequacy (CAR): 13 percent at end-2013 (regulatory minimum 10 percent); one bank’s CAR fell just below the regulatory minimum.
  - Provision coverage ratio: 48 percent (down from 52 percent a year earlier).
  - BCV’s alternative NPL definition (Circular 150) yields an NPL ratio of 13 percent in December 2013 and provisions-to-NPLs ratio of 60 percent.
- Policy implementation:
  - Authorities curtailed capital and current spending relative to the original budget in line with Fund advice; an ambitious medium-term fiscal consolidation plan was not adopted.
  - The BCV kept rates on hold through 2013 and strengthened supervision, including stricter provisioning and dividend restrictions for banks.

### External position, competitiveness, and external vulnerabilities
- External position and reserves:
  - International reserves: about 4½ months of prospective imports (projected to remain around this level over the medium term).
  - Exports of goods and services increased from about 30 percent of GDP in 2003 to about 45 percent of GDP in 2012; tourism-related travel represents about two thirds of total exports of goods and services.
- External financing and debt:
  - External public debt increased from 39 percent of GDP in 2008 to 74 percent of GDP in 2013, with the current account historically averaging about 16 percent of GDP financed increasingly by government borrowing as grants and FDI declined.
- Competitiveness indicators:
  - World Economic Forum global competitiveness rank: 122nd out of 148 countries (2013–14).
  - Noted weaknesses: labor market efficiency, financial market development, macroeconomic environment, market size.
  - Most problematic factors (percent of responses, selected): Access to financing 22.9; Tax rates 13.8; Inefficient government bureaucracy 11.6; Inadequately educated workforce 9.3; Inadequate supply of infrastructure 8.9.
- Exchange rate assessment:
  - Three CGER-type methodologies indicate the real exchange rate (REER) is broadly in line with fundamentals; possible undervaluation indicated but below the 10 percent threshold for statistical significance.
  - Quantitative REER misalignments reported (selected): Equilibrium Real Effective Exchange Rate: -7.9; Macroeconomic Balance REER misalignment: -9.2 to -6.5.

### Outlook and risks
- Growth forecast:
  - Staff projects GDP growth of 3 percent in 2014; medium-term growth of about 4 percent consistent with a lower middle-income economy facing competitiveness challenges.
- Balance of payments and reserves outlook:
  - Balance of payments forecast to reach a small surplus in 2014.
  - International reserves expected to cover about 4½ months of prospective imports in 2014, supported by strong remittances, public capital flows, and an anticipated uptick in FDI.
- Upside risks:
  - More rapid resumption of FDI in stalled and new projects could bolster growth.
  - Successful implementation of the public investment program and structural reforms could increase productivity and raise potential growth.
- Downside risks:
  - High dependence on tourism and remittances increases vulnerability to a delayed euro-area recovery and competition from other destinations.
  - Strong financial ties to Portugal (three of the four largest banks in Cabo Verde are owned by Portuguese groups) raise vulnerability to euro-area financial stress.
  - Domestic fiscal risks due to high public debt.
  - Financial sector risks from high NPLs, which could further impair growth.

### Box — NPLs and economic growth: findings, evidence, and BCV actions
- NPL dynamics and composition:
  - NPL ratio rose sharply since 2009, peaking at 20 percent in September 2013 and easing to 16 percent by December 2013.
  - Corporates account for about two-thirds of the NPL stock (concentrated in tourism, transport, business, and construction); households account for about one-third, with impaired mortgages concentrated in the household impaired portfolio.
- Empirical evidence on NPLs and growth:
  - Selected elasticities reported from studies:
    - Espinoza and Prasad (2010): elasticity of 0.4 for NPLs on non-oil growth (Gulf Cooperation Council, 1995–2008).
    - Nkusu (2011): elasticity of 0.6 over three years (26 advanced countries, 1999–2009).
    - Klein (2013): elasticity of 0.6 over two years (Central Eastern and South Eastern Europe, 1998–2011).
  - These results suggest the recent increase in NPLs entails risks for growth, though caution is warranted in direct application to Cabo Verde.
- BCV supervisory and remedial actions:
  - BCV conducted a detailed review of asset quality for top clients of the largest banks; required IFRS-compliant definitions.
  - BCV developed a credit impairment index to encourage transparency, asked banks to cease dividend payments in 2013, and undertakes post-balance sheet submission adjustments to enforce provisioning standards.
- Constraints on NPL resolution:
  - Slow write-offs due to weak economic conditions, lengthy foreclosure processes, and underdeveloped markets for distressed real estate assets.
  - Bank profitability (return on equity) declined to 2.3 percent in 2013 from 9.1 percent in 2010.
  - Capital adequacy declined from 15.6 percent in 2010 to 13 percent in 2013 for the system as a whole.
- BCV supervisory recommendations (selected):
  - continue to monitor banks closely, and intervene preemptively to reinforce resilience of their positions;
  - encourage banks to strengthen and enforce loss recognition and provisioning standards;
  - provide proper guidance on loan restructuring, collateral valuation and asset classification;
  - align accounting and disclosure practices on loan quality and provisioning to best practices;
  - study backlogged cases and develop an action plan to tackle delays in judicial processes.

### Fiscal consolidation, public debt, and debt sustainability
- Public debt situation and outlook:
  - Public debt approaching 100 percent of GDP.
  - With authorities’ MTFF expenditure plans (including onlending), public debt would exceed 110 percent of GDP by 2017.
  - Under staff’s recommended adjustment scenario, public debt would peak at 103 percent of GDP, and fall below 100 percent of GDP by 2017.
  - Under revised MTFF spending path public debt would peak at 108 percent of GDP in 2016–17.
- 2014 fiscal stance and financing needs:
  - 2014 budget entails a deficit of about 9 percent of GDP, over 1 percentage point higher than in 2013.
  - Including onlending, total financing needs would reach 13½ percent of GDP.
- Staff recommendations for fiscal consolidation:
  - For 2014, expenditure cuts of about 1 percentage point of GDP, and a similar reduction in public investment financed by onlending.
  - Major new public investment projects should meet stringent tests of value-for-money.
  - For 2015–17, a more cautious public investment plan and slower growth in some current expenditure items (while protecting social spending).
  - Staff’s proposed path would reduce the fiscal deficit by over 5 percentage points of GDP between 2013 and 2017, and total financing by 9½ percentage points—about 4½ percentage points more than envisaged in the authorities’ plans.
- Domestic resource mobilization and tax administration:
  - Achievements in 2013: harmonization and streamlining of VAT rates, passage of three new tax codes, launch of a large taxpayer office.
  - Plans to resolve sizeable tax arrears (about 4 percent of GDP) and outstanding claims for tax refunds (about 1½ percent of GDP).
  - 2014 budget allocates 0.6 percent of GDP towards settling claims for tax refunds and other refunds.
- Public financial management and SOEs:
  - Six largest SOEs registered total losses of 0.7 percent of GDP and debt of 27 percent of GDP in 2012; preliminary estimates indicate better performance in 2013.
  - Social housing program “Casa Para Todos” total program cost of €170 million over 2011–17, or 11 percent of 2014 GDP; program entails financial risks and requires careful, phased approach.
- Debt sustainability assessment:
  - Based on authorities’ revised expenditure projections, Cabo Verde’s external debt risk rating assessed as “moderate”.
  - NPV of external debt peaks at 49 percent—just shy of the 50 percent threshold in the baseline.
  - One-time depreciation shock breaches debt-to-GDP and debt service-to-revenue thresholds.
  - Risks to overall debt sustainability remain high; contingent liabilities from SOE debt could raise the risk rating to “high” if the government assumes part of these liabilities through external loans.
- Policy implication:
  - Reducing debt distress risk depends critically on accelerating fiscal consolidation and advancing structural reforms to boost growth and enhance public sector efficiency.

### Monetary policy, peg, reserves, and policy space
- Reserve and peg status:
  - Following a 150 basis points policy rate increase in January 2012, international reserves recovered to about 4¼ months of prospective imports at end-2013.
  - Reserves cover 70 percent of emigrant deposits (which account for 40 percent of total deposits) and 25 percent of M2.
  - Real exchange rate broadly in line with fundamentals (CGER-type assessment).
- Staff views on policy easing:
  - Given weak economic growth, low inflation, and stabilization of international reserves, staff saw scope for a cautious loosening of the monetary policy stance.
  - Recommendation to reduce the 18 percent minimum reserve requirement to free up liquidity and support credit creation, with close monitoring of liquidity and readiness to sterilize if reserves come under pressure.
- Strengthening monetary transmission:
  - Policy rate is currently not playing the role of a reference rate; strengthen BCV liquidity management and develop government securities market to create a market-based term structure of interest rates.
- Authorities' actions:
  - The policy rate was cut by 150 basis points—to 4.25 percent—on March 1, 2014.
  - The rediscount rate and the BCV’s lending facility rate were cut by 150 basis points, to 8.25 percent and 7.25 percent, respectively.
  - Aim: help stimulate financing for viable investment projects and support the recovery.

### Monetary transmission, liquidity management, and supervisory priorities
- Transmission and liquidity:
  - The BCV noted that the impact of a rate cut on lending rates was unlikely to be significant given weaknesses in the transmission mechanism.
  - The interbank market has had no trades since 2012; BCV attributed this to all banks having excess liquidity.
  - BCV requested further TA on liquidity management, particularly for retaining control over the monetary base (and international reserves) when intervening to help banks facing short-term liquidity needs.
  - MCM TA mission on liquidity management took place in April 2014.
- Minimum reserve requirement:
  - The BCV was of the view that the MRR should be maintained at 18 percent; BCV warned against changing the MRR too frequently.
- Financial stability and supervision:
  - New regulations harmonizing asset quality classification and provisioning standards came into effect as of December 2013.
  - Recent enactment of the Basic Banking Law and the Financial Institutions Law enhances BCV powers; next step is drafting implementing regulations.
  - Staff encouraged BCV to enhance banking supervision, put in place crisis management policies and contingency planning, reach understandings with bank owners on liquidity/solvency threats, and strengthen collaboration with the Ministry of Finance.
- Provisioning and accounting harmonization:
  - Banks were required to harmonize accounting provisions by end-December 2013.
  - If provisions recorded in financial statements are included, the coverage ratio of provisions improves to 55 percent for credits more than 30 days overdue, and 70 percent for credits more than 90 days overdue.

### Raising potential growth — key constraints and policy priorities (Appendix I)
- Historical context and TFP:
  - Annual real GDP growth averaged over 6 percent during 2000–07; capital deepening drove much of earlier high-growth period.
  - TFP has been relatively small and declining; TFP decline in the late 2000s coincided with the economic downturn.
- Binding constraints identified:
  - Skill mismatch: unemployment over 16 percent at end-2013; youth unemployment more than double that rate; about 9,300 formal job offers for graduates vs. around 23,000 young people looking for jobs in 2012.
  - Labor market inefficiencies: WEF labor market efficiency rank 129th out of 148 countries; labor market more restrictive than SSA SMICs on several indicators.
  - Business environment and SME finance: access to financing a major obstacle; large informal sector; need to strengthen SME financing.
  - Public debt and public investment efficiency: public debt increased by nearly 40 percentage points of GDP since 2008, reaching an estimated 95 percent of GDP at end-2013; further productivity gains depend on improving efficiency of public investment.
- Policy recommendations:
  - Reduce skill mismatch via technical and vocational training linked to key sectors and encourage private sector participation in human capital development.
  - Ease regulatory burdens in the labor market through labor code reforms to increase flexibility.
  - Improve access to finance for SMEs and entrepreneurs; expand entrepreneurial training and business support infrastructure.
  - Enhance efficiency and value-for-money of public investment and reduce public sector crowding-out of domestic finance to free space for private sector investment.

### Key numeric indicators and projections (selected reported values preserved)
- Real GDP growth: 2011: 4.0; 2012: 1.2; 2013: 0.5; 2014 (staff): 3.0; medium-term about 4 percent.
- Inflation (CPI annual average): 2011: 4.5; 2012: 2.5; 2013: 1.5.
- Current account (including official transfers, percent of GDP): 2011: -16.3; 2012: -11.3; 2013: -4.5.
- Gross international reserves (months of prospective imports): 2011: 3.5; 2012: 4.2; 2013: 4.4; 2014 (proj.): 4.6.
- NPLs to total loans (end year, percent): 2009: 8.8; 2010: 8.4; 2011: 11.8; 2012: 14.0; 2013: 16.4.
- Provisions to NPLs (percent): 2009: 65.8; 2010: 73.0; 2011: 56.6; 2012: 52.0; 2013: 47.9.
- Regulatory capital to risk-weighted assets (CAR, percent): 2009: 11.4; 2010: 15.6; 2011: 15.2; 2012: 12.1; 2013: 13.3.
- Return on equity and profitability: return on equity declined to 2.3 percent in 2013 from 9.1 percent in 2010; return on assets: 2009: 0.7; 2010: 0.7; 2011: 0.4; 2012: 0.3; 2013: 0.2.
- Total nominal government debt (percent of GDP): 2011: 77.8; 2012: 90.2; 2013: 97.6; 2014: 104.1; 2015: 107.4; 2016: 108.4; 2017: 107.5.
- Present value of external debt (percent of GDP): 2013: 42.6; 2014: 45.8; 2015: 47.8; 2016: 48.5; 2017: 48.2.
- Coverage ratio of provisions (including harmonized provisions): 55 percent for credits more than 30 days overdue; 70 percent for credits more than 90 days overdue.
- Minimum reserve requirement (MRR): 18 percent.
- Emigrant deposits account for about 40 percent of total deposits.
- No interbank market trades since 2012.
- BCV policy rate cut on March 1, 2014: policy rate to 4.25 percent; rediscount rate to 8.25 percent; BCV lending facility rate to 7.25 percent.
- Public investment (net acquisition of non-financial assets) corresponded to 9.1 percent of GDP in 2013.
- Social housing program “Casa Para Todos” total program cost: €170 million over 2011–17, or 11 percent of 2014 GDP.

*Source: IMF staff report excerpt: "External Stability Assessment" (content unit _cr14296).*

### 1.  External Stability Assessment  ___________________________________________________________________7

### External Stability Assessment

### Developments and Challenges Ahead — The Long-Term Setting
- Over the last two decades, Cabo Verde:
  - Graduated to middle-income country status in 2007.
  - Reduced poverty from 49 percent in 1989 to 25 percent in 2011.
  - Is on track to achieve all Millennium Development Goals by 2015.
- Key medium-term challenges:
  - The large-scale Public Investment Program (PIP) is beginning to wind down.
  - Tourism growth may slow as market share limits are reached.
  - Total factor productivity has fallen over the last decade, necessitating structural reforms to boost competitiveness and support job-creating, inclusive growth.
- Fiscal sustainability concern:
  - Public debt rose to 98 percent of GDP at end-2013—a rise of 40 percentage points since 2008.
  - Debt financing has been highly concessional, but risks to debt sustainability remain if fiscal consolidation stalls.

### Current Conditions (2013)
- Growth and labor market:
  - Real GDP growth: 0.5 percent for 2013 (down from 1.2 percent in 2012 and 4 percent in 2011).
  - Tourism accounts for about a fifth of the economy.
  - Credit to the economy grew by only 1 percent in 2013.
  - Unemployment: 16½ percent at end-2013 (about the same as in 2012; up from 12 percent in 2011); youth unemployment about double that rate.
  - Average inflation: 1½ percent.
- External sector and reserves:
  - Current account deficit narrowed to about 4½ percent of GDP in 2013.
  - International reserves recovered to about 4½ months of prospective imports.
- Fiscal outturn and budget reprogramming:
  - Total revenue increased by about ¾ percentage point of GDP relative to original budget.
  - Tax revenue edged down about ¼ percentage point of GDP; grants increased by ½ percentage point; other non-tax revenue increased by ½ percentage point.
  - Current expenditure reduced by 1½ percentage points of GDP relative to budget.
  - Public investment (including onlending) reduced by 4 percentage points of GDP relative to budget.
  - Fiscal deficit fell by about 2 percentage points of GDP to 7¾ percent; total financing including onlending was 13.2 percent of GDP.
- Monetary and liquidity conditions:
  - Since May 2013, rates on central bank bills and short-term government securities fell below 1 percent, below the 5.75 percent policy rate.
  - Excess liquidity built up in banks, but this has not translated into substantial credit growth.
  - Deposits rates remained relatively high due to competition for emigrant funds; loan rates remained high due to bank risk aversion and high NPLs.
- Financial stability and banking sector:
  - NPL ratio peaked at 20 percent in September 2013, eased to 16 percent by December 2013.
  - Banking system capital adequacy (CAR): 13 percent at end-2013 (regulatory minimum 10 percent); one bank’s CAR fell just below the regulatory minimum.
  - Provision coverage ratio: 48 percent (down from 52 percent a year earlier).
  - BCV’s alternative NPL definition (Circular 150) yields an NPL ratio of 13 percent in December 2013 and provisions-to-NPLs ratio of 60 percent.
- Policy implementation:
  - Authorities curtailed capital and current spending relative to the original budget in line with Fund advice.
  - A recommended ambitious medium-term fiscal consolidation plan was not adopted.
  - The BCV kept rates on hold through 2013 and strengthened supervision, including stricter provisioning and dividend restrictions for banks.

### External Assessment (Competitiveness, Exchange Rate, and External Vulnerabilities)
- External position and reserves:
  - International reserves: about 4½ months of prospective imports (projected to remain around this level over the medium term).
  - Exports of goods and services increased from about 30 percent of GDP in 2003 to about 45 percent of GDP in 2012; tourism-related travel represents about two thirds of total exports of goods and services.
- External financing and debt:
  - External public debt increased from 39 percent of GDP in 2008 to 74 percent of GDP in 2013, with the current account historically averaging about 16 percent of GDP financed increasingly by government borrowing as grants and FDI declined.
- Competitiveness indicators:
  - World Economic Forum global competitiveness rank: 122nd out of 148 countries (2013–14).
  - Noted weaknesses: labor market efficiency, financial market development, macroeconomic environment, market size.
  - Business surveys identify access to financing, labor market issues, and inadequate supply of infrastructure among the most problematic factors for doing business.
  - Most problematic factors (percent of responses, selected): Access to financing 22.9; Tax rates 13.8; Inefficient government bureaucracy 11.6; Inadequately educated workforce 9.3; Inadequate supply of infrastructure 8.9.
- Exchange rate assessment:
  - Three CGER-type methodologies indicate the real exchange rate (REER) is broadly in line with fundamentals; possible undervaluation indicated but below the 10 percent threshold for statistical significance.
  - Quantitative REER misalignments reported (selected): Equilibrium Real Effective Exchange Rate: -7.9; Macroeconomic Balance REER misalignment: -9.2 to -6.5 (with CA elasticity and adjustments noted in table).

### Outlook and Risks
- Growth forecast:
  - Staff projects GDP growth of 3 percent in 2014; medium-term growth of about 4 percent consistent with a lower middle-income economy facing competitiveness challenges.
- Balance of payments and reserves outlook:
  - Balance of payments forecast to reach a small surplus in 2014.
  - International reserves expected to cover about 4½ months of prospective imports in 2014, supported by strong remittances, public capital flows, and an anticipated uptick in FDI.
- Upside risks:
  - More rapid resumption of FDI in stalled and new projects could bolster growth.
  - Successful implementation of the public investment program and structural reforms could increase productivity and raise potential growth.
- Downside risks:
  - High dependence on tourism and remittances increases vulnerability to a delayed euro-area recovery and competition from other destinations.
  - Strong financial ties to Portugal (three of the four largest banks in Cabo Verde are owned by Portuguese groups) raise vulnerability to euro-area financial stress.
  - Domestic fiscal risks due to high public debt.
  - Financial sector risks from high NPLs, which could further impair growth.

### Box — NPLs and Economic Growth: Findings and Policy Actions
- NPL dynamics and composition:
  - NPL ratio rose sharply since 2009, peaking at 20 percent in September 2013 and easing to 16 percent by December 2013.
  - Corporates account for about two-thirds of the NPL stock (concentrated in tourism, transport, business, and construction); households account for about one-third, with impaired mortgages concentrated in the household impaired portfolio.
- Empirical evidence on NPLs and growth:
  - Studies indicate high NPLs exert a drag on growth via reduced intermediation and bank profitability.
  - Selected elasticities reported from studies:
    - Espinoza and Prasad (2010): elasticity of 0.4 for NPLs on non-oil growth (Gulf Cooperation Council, 1995–2008).
    - Nkusu (2011): elasticity of 0.6 over three years (26 advanced countries, 1999–2009).
    - Klein (2013): elasticity of 0.6 over two years (Central Eastern and South Eastern Europe, 1998–2011).
  - These results suggest the recent increase in NPLs entails risks for growth, though caution is warranted in direct application to Cabo Verde.
- BCV supervisory and remedial actions:
  - BCV conducted a detailed review of asset quality for top clients of the largest banks; found inconsistent procedures and required IFRS-compliant definitions.
  - BCV developed a credit impairment index to encourage transparency, asked banks to cease dividend payments in 2013, and undertakes post-balance sheet submission adjustments to enforce provisioning standards.
- Constraints on NPL resolution:
  - Slow pace of write-offs due to weak economic conditions, lengthy foreclosure processes, and underdeveloped markets for distressed real estate assets.
  - Banks’ capacity to absorb further losses is limited; bank profitability (return on equity) declined to 2.3 percent in 2013 from 9.1 percent in 2010.
  - Capital adequacy declined from 15.6 percent in 2010 to 13 percent in 2013 for the system as a whole.

*Source: IMF staff report excerpt: "External Stability Assessment" (content unit _cr14296).*

### 12.1 percent in 2012, before recovering to 13.3 percent in 2013.

### _cr14296 - 12.1 percent in 2012, before recovering to 13.3 percent in 2013.

### Nonperforming loans and supervisory recommendations
- The BCV is encouraged to take the following steps to support the resolution of the NPL overhang:
  - continue to monitor banks closely, and intervene preemptively to reinforce resilience of their positions;
  - encourage banks to strengthen and enforce loss recognition and provisioning standards;
  - provide proper guidance on loan restructuring, collateral valuation and asset classification;
  - align current accounting and disclosure practices on loan quality and provisioning to best practices;
  - study backlogged cases and develop an action plan to tackle delays in judicial processes.

### Policy discussions: key challenges facing Cabo Verde
- Four key challenges identified:
  - With public debt already at high levels, can fiscal policy still play a major role in supporting long-term growth?
  - Given monetary policy’s primary objective of safeguarding the peg, is there scope to loosen the monetary policy stance in support of the recovery?
  - How has the downturn affected financial stability?
  - What can be done to increase competitiveness and improve the long-term outlook for growth?
- These issues are central to ensuring macroeconomic and debt sustainability in the near term, and for helping Cabo Verde shift to a productivity-led growth strategy over the medium term.

### A. Balancing fiscal consolidation with support for long-term growth — findings and projections
- Public debt situation and outlook:
  - Public debt approaching 100 percent of GDP.
  - With authorities’ MTFF expenditure plans (including onlending), public debt would exceed 110 percent of GDP by 2017.
  - Under staff’s recommended adjustment scenario, public debt would peak at 103 percent of GDP, and fall below 100 percent of GDP by 2017.
  - Under revised MTFF spending path public debt would peak at 108 percent of GDP in 2016–17.
- 2014 fiscal stance and financing needs:
  - 2014 budget entails a deficit of about 9 percent of GDP, over 1 percentage point higher than in 2013.
  - Including onlending, total financing needs would reach 13½ percent of GDP.
- Staff recommendations for fiscal consolidation:
  - For 2014, expenditure cuts of about 1 percentage point of GDP, and a similar reduction in public investment financed by onlending.
  - Major new public investment projects should meet stringent tests of value-for-money.
  - For 2015–17, a more cautious public investment plan and slower growth in some current expenditure items (while protecting social spending).
  - Staff’s proposed path would reduce the fiscal deficit by over 5 percentage points of GDP between 2013 and 2017, and total financing by 9½ percentage points—about 4½ percentage points more than envisaged in the authorities’ plans.
- Domestic resource mobilization and tax administration:
  - Achievements in 2013: harmonization and streamlining of VAT rates, passage of three new tax codes, launch of a large taxpayer office.
  - Plans to resolve sizeable tax arrears (about 4 percent of GDP) and outstanding claims for tax refunds (about 1½ percent of GDP).
  - 2014 budget allocates 0.6 percent of GDP towards settling claims for tax refunds and other refunds.
- Public financial management and SOEs:
  - Progress: sound fiscal forecasting tools, medium-term fiscal framework, program-based budgeting.
  - Risk noted: under current procurement practices there is a risk of unmonitored arrears; recommendation to introduce robust commitment controls and improve monitoring of arrears.
  - SOE performance in 2012: six largest SOEs registered total losses of 0.7 percent of GDP and debt of 27 percent of GDP; preliminary estimates indicate better performance in 2013.
  - Social housing program “Casa Para Todos” total program cost of €170 million over 2011–17, or 11 percent of 2014 GDP; program entails financial risks and requires careful, phased approach.

### A. Balancing fiscal consolidation — authorities' measures and views
- Authorities’ stance:
  - Commitment to preserving macroeconomic stability and bolster domestic revenue mobilization.
  - Expenditure containment measures will be taken if revenue underperforms.
- Recent/ex post measures:
  - Preliminary expenditure containment measures for 2014–17 to lower expenditure by about 1½ percentage points of GDP per year; about half of the reduction in goods and services, remainder split evenly between other current expenditure and capital expenditure.
  - Authorities working with the World Bank to adopt a national investment review board to ensure projects meet stringent rate-of-return criteria.

### Debt sustainability assessment and risks
- External debt risk rating and vulnerabilities:
  - Based on authorities’ revised expenditure projections, Cabo Verde’s external debt risk rating assessed as “moderate” (Debt Sustainability Analysis Annex).
  - NPV of external debt peaks at 49 percent—just shy of the 50 percent threshold in the baseline.
  - One-time depreciation shock breaches debt-to-GDP and debt service-to-revenue thresholds.
  - Risks to overall debt sustainability remain high; contingent liabilities from SOE debt could raise the risk rating to “high” if the government assumes part of these liabilities through external loans.
- Policy implications:
  - Reducing debt distress risk depends critically on accelerating fiscal consolidation and advancing structural reforms to boost growth and enhance public sector efficiency.

### B. Monetary policy: peg, reserves, and policy space
- Reserve and peg status:
  - Following a 150 basis points policy rate increase in January 2012, international reserves recovered to about 4¼ months of prospective imports at end-2013.
  - Reserves cover 70 percent of emigrant deposits (which account for 40 percent of total deposits) and 25 percent of M2.
  - Real exchange rate broadly in line with fundamentals (CGER-type assessment).
- Staff views on policy easing:
  - Given weak economic growth, low inflation, and stabilization of international reserves, staff saw scope for a cautious loosening of the monetary policy stance.
  - A cut in the policy rate would send an important signal, though weaknesses in the transmission mechanism would limit impact on market rates.
  - High spread between Cabo Verde rates and advanced economy markets makes significant capital outflow after a rate cut unlikely; a rate cut could encourage higher inflows if it supports recovery.
  - Recommendation to reduce the 18 percent minimum reserve requirement to free up liquidity and support credit creation, with close monitoring of liquidity and readiness to sterilize if reserves come under pressure.
- Strengthening monetary transmission:
  - Policy rate is currently not playing the role of a reference rate.
  - Strengthening BCV liquidity management could align the policy rate with market rates.
  - Reform needed to develop government securities market to create a non-segmented market-based term structure of interest rates, taking care that large public institutions do not distort pricing.
  - Broader reforms to the framework for monetary operations recommended.
- Resilience measures:
  - Explore options to make foreign assets held by the “International Support for Cape Verde Trust Fund” accessible to the BCV when needed; MCM stands ready to provide guidance.
- Authorities' actions:
  - The policy rate was cut by 150 basis points—to 4.25 percent—on March 1, 2014.
  - The rediscount rate and the BCV’s lending facility rate were cut by 150 basis points, to 8.25 percent and 7.25 percent, respectively.
  - Aim: help stimulate financing for viable investment projects and support the recovery; BCV emphasized these measures work better alongside structural measures to reduce risks and bolster potential growth.

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

### 31.      The BCV noted that the impact of a rate cut on lending rates was unlikely to be

### _cr14296 - 31.      The BCV noted that the impact of a rate cut on lending rates was unlikely to be

### Monetary policy, liquidity, and transmission
- The BCV noted that the impact of a rate cut on lending rates was unlikely to be significant, given weaknesses in the transmission mechanism.
- The interbank market has had no trades since 2012, which the BCV attributed to all banks having excess liquidity.
- The BCV requested further TA on liquidity management, in particular for retaining control over the monetary base (and international reserves) when the BCV intervenes to help banks facing a short-term liquidity need.
- Staff assessment: With the recent cut in the policy rate, staff assesses the stance of monetary policy as appropriate. Over time, the lower policy rate should help bring down market rates, catalyze credit creation and support growth.
- Staff note that given weak monetary transmission (through policy rate changes or by releasing required reserves) and existing excess liquidity, financial sector reforms addressing transmission weaknesses remain urgent.
- MCM TA mission on liquidity management took place in April 2014.

### Minimum reserve requirement (MRR) and exchange rate constraints
- The BCV was of the view that the MRR should be maintained at 18 percent.
- The BCV considers the MRR an important prudential tool, whose level should be determined by the stage of development and potential fragilities of the financial sector.
- The BCV warned against changing the MRR too frequently (it had only just been increased 2 years ago).
- The BCV views the current level of the MRR—at 18 percent—as not very high in historical context, though high compared to peers.
- The BCV noted constraints that the fixed exchange rate regime places on monetary policy, in particular given that about 40 percent of the funding of banks consists of emigrant deposits.

### Financial stability measures and supervision
- The BCV adopted a more stringent definition of NPLs (using IAS/IFRS standards), undertook an asset impairment review for the top 100 clients of systemic banks, and issued guidance to banks to suspend dividend payments (done for 2012, and may also be done for 2013).
- New regulations harmonizing asset quality classification and provisioning standards came into effect as of December 2013.
- Progress in implementing recommendations from the 2009 FSAP continues, especially in bank supervision and the legal and regulatory framework.
- Recent enactment of the Basic Banking Law and the Financial Institutions Law enhances the BCV’s powers (including oversight of the offshore sector) and strengthens the framework for insolvency, enforcement, early intervention, and a broad range of resolution and liquidation tools; the next step is drafting implementing regulations.
- Staff encouraged the BCV to press ahead with remaining FSAP priorities, notably:
  - Enhance banking supervision to ensure proper classification of NPLs and proper provisioning.
  - Put in place robust crisis management policies and contingency planning.
  - Reach understandings with bank owners on handling possible liquidity and/or solvency threats.
  - Work closely with the bank whose CAR has fallen just below the 10 percent minimum to ensure it rebuilds capital quickly.
  - Strengthen collaboration between the BCV and the Ministry of Finance, including making the Financial Stability Committee fully operational.

### Provisioning coverage and accounting harmonization
- Banks were required to harmonize accounting provisions by end-December 2013.
- Where underprovisioning was identified, the BCV deducted estimated underprovisioning from bank capital and reported this as “adjusted” capital.
- Based on the harmonization exercise, if the value of provisions recorded in financial statements is included, the coverage ratio of provisions improves to 55 percent for credits more than 30 days overdue, and 70 percent for credits more than 90 days overdue.

### Financial Stability Report (FSR) — assessment and suggested enhancements
- The BCV began publishing an FSR in 2008; it compares well with peers in coverage of key stability risks and increasing use of sophisticated tools like stress tests.
- Suggested enhancements drawing on international best practices:
  - Improve linkages between assessments over time to clarify main changes in the assessment.
  - Strengthen forward orientation by using early warning tools and surveys (e.g., Bank Lending Survey).
  - Focus more on interconnectedness of banks to avoid missing systemic risks.
  - Consider a non-core part of the report for follow-up issues, selected articles, collaborative studies, or topical papers.
  - Include the BCV’s definition of financial stability and the aims of the FSR in each report to improve user understanding.
- The BCV’s FSR is published on a semi-annual basis and has progressively incorporated stress tests since 2009 (post-FSAP).

### Competitiveness, labor market, and growth outlook
- Cabo Verde improved in the WEF Global Competitiveness rankings from 146th in 2010 to 122nd in 2012.
- The exchange rate is assessed as broadly in line with long-term fundamentals.
- Key weaknesses relative to peers remain and Cabo Verde has demonstrated greater macroeconomic vulnerabilities than peers.
- Labor market: WEF ranks Cabo Verde 129th out of 148 countries for labor market efficiency.
- A new Labor Code (being finalized through broad-based consultation) aims to reduce inflexibilities on working hours, disciplinary measures, and redundancy regulations.
- Authorities should explore more funding for vocational training and skills enhancement to address skill mismatch and total factor productivity decline.

### Social development and GPRSP-III
- Cabo Verde has continued strong social development progress, putting achievement of all MDGs by 2015 within reach.
- GPRSP-III is an ambitious strategy to promote growth, create jobs, and reduce poverty; staff recommends further prioritization given constraints on financial and human resources.
- Policies should target groups and areas with higher incidence of poverty and unemployment (rural/agricultural areas and women).

### Staff appraisal and policy recommendations
- Near-term: Outlook for growth is improving but subject to downside risks; tourism and FDI expected to recover; modest credit growth could aid recovery as banks work through NPLs.
- For 2014, the macroeconomic policy stance is broadly appropriate but required a shift in the policy mix and a reduction in the fiscal deficit; staff supports accommodative policies given moderate and uncertain growth, but recommends a more ambitious fiscal consolidation path than authorities envisage due to high public debt.
- Medium-term: Ambitious fiscal consolidation is key to ensure macroeconomic stability and provide a basis for private sector-led growth.
  - Debt is described as approaching 100 percent of GDP; staff welcomes expenditure containment measures for 2014 and beyond but recommends further containment to put public debt on a faster downward trajectory.
- Fixed exchange rate regime has anchored macroeconomic stability; external stability does not appear at risk, but high dependence on tourism and remittances increases vulnerability to external shocks, underscoring the need for competitiveness-enhancing reforms and cautious macroeconomic management.
- Data shortcomings: National accounts data are released with a significant lag and only on an annual basis, posing a serious obstacle to policy formulation; STA has provided TA focusing on quarterly national accounts data.

### Key numeric facts and indicators (reported values preserved)
- No interbank market trades since 2012.
- MRR maintained at 18 percent.
- MRR had been increased 2 years ago (relative to the reporting period).
- About 40 percent of the funding of banks consists of emigrant deposits.
- MCM TA mission on liquidity management took place in April 2014.
- Coverage ratio of provisions (including harmonized provisions): 55 percent for credits more than 30 days overdue.
- Coverage ratio of provisions (including harmonized provisions): 70 percent for credits more than 90 days overdue.
- WEF Global Competitiveness ranking: 146th in 2010 and 122nd in 2012.
- WEF labor market efficiency ranking: 129th out of 148 countries.
- Heritage Foundation Economic Freedom Index ranking: 60th out of 160 countries.
- Historical average long-term growth for micro and small economies: 3–4 percent.
- A bank’s CAR has fallen just below the 10 percent minimum.
- Public debt described as approaching 100 percent of GDP.

*Source: IMF staff report content (cr14296).*

### 50.      Staff urges the authorities to consent to the 2010 IMF Quota and Voice reforms.

### _cr14296 - 50.      Staff urges the authorities to consent to the 2010 IMF Quota and Voice reforms.

### Staff recommendations and procedural note
- Staff urges the authorities to consent to the 2010 IMF Quota and Voice reforms.
- Staff recommends that the next Article IV consultation take place on the standard 12 month cycle.

### Recent economic developments (high-level findings)
- Real GDP growth: 2008–2013 chart indicates growth slowed sharply; table reports Real GDP: 2011: 4.0, 2012: 1.2, 2013: 0.5, 2014: 3.0, 2015: 3.5, 2016: 4.0, 2017: 4.0.
- Inflation: subdued; Consumer price index (annual average): 2011: 4.5, 2012: 2.5, 2013: 1.5, 2014: 2.0, 2015: 2.5, 2016: 2.5, 2017: 2.5.
- Tourism receipts and guests: tourism sector continues to grow, though at a slower pace (charted in € millions and 1,000 guests).
- Current account: declined substantially; External current account (including official transfers, percent of GDP): 2011: -16.3, 2012: -11.3, 2013: -4.5, projected 2014: -9.1, 2015: -10.8, 2016: -10.9, 2017: -9.2.
- Gross international reserves stabilized: Gross international reserves (months of prospective imports) 2011: 3.5, 2012: 4.2, 2013: 4.4, 2014: 4.6, 2015: 4.6, 2016: 4.5, 2017: 4.4.

### Monetary developments and credit growth
- Money growth has been driven by rising Net Foreign Assets (NFA); Net foreign assets (change in percent of broad money, 12 months earlier): 2011: -4.2, 2012: 4.6, 2013: 6.9, 2014: 3.5, 2015: 2.2, 2016: 0.2, 2017: 0.5.
- Broad money (M2) (annual percent change): 2011: 2.2, 2012: 6.3, 2013: 11.3, 2014: 6.6, 2015: 10.3, 2016: 9.2, 2017: 8.0.
- Credit to the economy: has stalled; Credit to the economy (percent change) 2011: 8.0, 2012: 0.0, 2013: 1.3, 2014: 5.1, 2015: 6.0, 2016: 6.2, 2017: 5.8.
- Interest rate spreads: gap between lending and deposit rates remains large (charted: Euribor (2 week), 6m T-bill rate, BCV Policy Rate, Bank Lending Rate, Bank Deposit Rate).

### Financial sector indicators and risks
- Nonperforming loans (NPLs) increased: Nonperforming loans to total loans (end year) — 2009: 8.8, 2010: 8.4, 2011: 11.8, 2012: 14.0, 2013: 16.4 (percent).
- Provisions to NPLs: 2009: 65.8, 2010: 73.0, 2011: 56.6, 2012: 52.0, 2013: 47.9 (percent).
- Capital adequacy: Regulatory capital to risk-weighted assets — 2009: 11.4, 2010: 15.6, 2011: 15.2, 2012: 12.1, 2013: 13.3 (percent).
- Profitability: Return on assets — 2009: 0.7, 2010: 0.7, 2011: 0.4, 2012: 0.3, 2013: 0.2 (percent).
- Liquidity indicators (2009–2013): Liquid assets to total assets — 2009: 16.4, 2010: 12.5, 2011: 13.3, 2012: 8.2, 2013: 21.2 (percent).

### Cabo Verde versus small middle-income SSA peers (key comparisons)
- Fiscal deficit: Government balance excluding grants shows Cabo Verde's fiscal deficit has been much higher than peers (charted).
- Reserves coverage: Cabo Verde's months of next year's imports have gotten closer to the small MICs average (charted).
- Public debt: public debt is now three times the average for small MICs (charted); Total nominal government debt (percent of GDP): 2011: 77.8, 2012: 90.2, 2013: 97.6, 2014: 104.1, 2015: 107.4, 2016: 108.4, 2017: 107.5.
- Growth and inflation: Real GDP growth has been below small MICs average in recent years; headline inflation is below average.

### Selected economic indicators and projections (highlights from Table 1)
- Real GDP (annual percent change): 2011: 4.0, 2012: 1.2, 2013: 0.5, 2014: 3.0, 2015: 3.5, 2016: 4.0, 2017: 4.0.
- Exports of goods and services (percent of GDP): 2011: 17.3, 2012: 7.2, 2013: 5.1, 2014: 6.8, 2015: 8.9, 2016: 9.3, 2017: 9.3.
- Imports of goods and services (percent change): 2011: 17.9, 2012: -8.1, 2013: -6.9, 2014: 11.9, 2015: 9.9, 2016: 7.2, 2017: 5.0.
- Broad money (M2) (percent change): 2011: 4.6, 2012: 6.3, 2013: 11.3, 2014: 6.6, 2015: 10.3, 2016: 9.2, 2017: 8.0.
- External current account (including official transfers, percent of GDP): see above under Recent economic developments.
- Overall balance of payments (percent of GDP): 2011: -2.7, 2012: 2.7, 2013: 3.5, projected 2014: 3.2, 2015: 2.2, 2016: 0.6, 2017: 0.8.
- Gross international reserves (months of prospective imports): see above.

### Balance of payments (selected figures, Table 2; millions of euros)
- Current account balance (including official transfers): 2011: -218, 2012: -156, 2013: -64, 2014: -137, 2015: -173, 2016: -185, 2017: -167.
- Trade balance: 2011: -609, 2012: -557, 2013: -470, 2014: -552, 2015: -623, 2016: -665, 2017: -687.
- Services (net): 2011: 185, 2012: 254, 2013: 261, 2014: 285, 2015: 323, 2016: 359, 2017: 400.
- Tourism receipts (of services receipts): 2011: 253, 2012: 307, 2013: 333, 2014: 365, 2015: 402, 2016: 443, 2017: 489.
- Current transfers (net): 2011: 258, 2012: 202, 2013: 192, 2014: 185, 2015: 189, 2016: 191, 2017: 195.
- Gross international reserves (end of period, millions of euros): 2011: 263.3, 2012: 299.3, 2013: 347.5, 2014: 395.9, 2015: 431.2, 2016: 440.6, 2017: 454.9.
- Months of next year's imports of goods and services: 2011: 3.5, 2012: 4.2, 2013: 4.4, 2014: 4.6, 2015: 4.6, 2016: 4.5, 2017: 4.4.

### Central government operations (selected figures, Tables 3a and 3b)
- Revenue (millions of CVEsc): 2011: 37,916; 2012: 35,050; 2013: 37,259; projections: 2014: 42,380; 2015: 43,526; 2016: 47,180; 2017: 50,921.
- Expenditure (millions of CVEsc): 2011: 49,650; 2012: 50,118; 2013: 49,469; projections: 2014: 54,673; 2015: 54,901; 2016: 57,885; 2017: 60,114.
- Overall balance (incl. grants) as percent of GDP: 2011: -7.9, 2012: -9.9, 2013: -7.8, 2014: -7.4, 2015: -6.5, 2016: -5.7, 2017: -4.6.
- Net foreign borrowing for the budget (percent of GDP): 2011: 6.0, 2012: 7.5, 2013: 6.2, 2014: 5.7, 2015: 4.7, 2016: 3.5, 2017: 2.6.
- Total nominal government debt (percent of GDP): see Public debt under Selected economic indicators.

### Monetary and central bank surveys (selected figures, Tables 4a–4c)
- Net foreign assets (M2 monetary survey, millions of CVEsc): 2011: 19,986; 2012: 25,375; 2013: 33,854; projections: 2014: 38,619; 2015: 41,907; 2016: 42,296; 2017: 43,172.
- Broad money (M2, millions of CVEsc): 2011: 116,088; 2012: 123,410; 2013: 137,305; projections: 2014: 146,391; 2015: 161,476; 2016: 176,343; 2017: 190,488.
- Reserve money (M0, millions of CVEsc): 2011: 24,439; 2012: 32,580; 2013: 38,427; projections: 2014: 43,201; 2015: 47,234; 2016: 48,732; 2017: 50,680.
- Emigrant deposits (memorandum): 2011: 41,853; 2012: 45,454; 2013: 49,070; projections: 2014: 56,587; 2015: 62,434; 2016: 68,191; 2017: 73,668.
- Emigrant deposits/total deposits (percent): 2011: 38.9, 2012: 39.3, 2013: 38.0, 2014: 41.2, 2015: 41.2, 2016: 41.2, 2017: 41.2.

### Financial soundness and FSAP recommendations (Table 5 and Table 6)
- NPLs and provisioning: see Financial sector indicators above.
- Table 6: Implementation status for recommendations of the 2009 FSAP — varied status across recommendations:
  - Several items marked Done, In process, or Not initiated.
  - Key recommendation areas: reducing vulnerabilities in domestic banks; mitigating risks in the offshore sector; enhancing framework for monetary operations; enhancing banking supervision; establishing a crisis management framework; issues in systemic liquidity and monetary management; developing the money market; challenges for development of financial sector including access to finance; pension and insurance; legal and judicial issues.
- Specific FSAP actions listed (verbatim terms preserved from source): examples include "Encourage banks to raise capital above the regulatory minimum," "Enhance credit risk assessment framework," "Determine whether to wind down IFI sector or reform it to conform to international standards of regulation, supervision and integrity," "Use repos to implement all of BCV’s short-term interventions (standing facilities and auctions)," and "Implement a more comprehensive credit reporting system."

### Risks Assessment Matrix (Table 7) — key risks, likelihood, and impacts
- External risks:
  - Protracted period of slower growth in euro area economies — Likelihood: High; Impact if realized: High (would depress exports, remittances, FDI; lower grants and donor financing; significant impact on growth and foreign reserves).
  - Surges in global financial market volatility — Likelihood: High; Impact if realized: Medium (could depress remittances and put pressure on international reserves).
  - Financial stress in Euro area (particularly Portugal) re-emerges — Likelihood: Medium; Impact if realized: Medium (could seriously impact Cabo Verde given dependence on Portuguese capital).
- Internal risks:
  - Delays in fiscal consolidation — Likelihood: High; Impact if realized: High (could undermine investor perceptions, reduce capital inflows, weaken confidence in peg, reduce concessional support).
  - Surge in imports or shortfall in capital inflows — Likelihood: Medium; Impact if realized: High (could weaken balance of payments and reserves coverage; policy responses could weaken recovery).
  - Financial instability (rising NPLs) — Likelihood: Medium; Impact if realized: Medium (banking system fairly well capitalized; limited fiscal space for public bail-out).
  - Delays in SOE reforms — Likelihood: Medium; Impact if realized: Medium (SOE debt amounted to 27 percent of GDP as of end-2012; contingent liabilities).
  - Failure to increase productivity (structural reforms delays) — Likelihood: Medium; Impact if realized: Medium (affects competitiveness and potential growth).

### Millennium Development Goals and social indicators (Table 8 — selected entries)
- Employment to population ratio, 15+, total (%): 2000: 59, 2005: 60, 2010: 61, SSA 2010: 64.
- Immunization, measles (% of children ages 12–23 months): Cabo Verde: 86, SSA 2010: 92, 2010 value reported: 75.
- Mortality rate, infant (per 1,000 live births): Cabo Verde 2000: 32, 2005: 25, 2010: 19, SSA 2010: 71.
- GNI per capita, Atlas method (current US$): Cabo Verde 2000: 1,330; 2005: 2,080; 2010: 3,280; SSA 2010: 1,178.
- Net ODA received per capita (current US$): Cabo Verde 2000: 21, 2005: 43, 2010: 66, SSA 2010: 152.

*Source: IMF Article IV, March 2014. Updated by IMF staff in March 2014.*

### Appendix I.  Raising Potential Growth in Cabo Verde

### Appendix I.  Raising Potential Growth in Cabo Verde

### Overview and recent development challenges
- Cabo Verde achieved middle income country (MIC) status in December 2007.
- Annual real GDP growth averaged over 6 percent during 2000–07.
- Key recent growth drivers: tourism, tourism-related foreign investment, and construction—each strongly dependent on the global economy.
- A large-scale public investment program launched in 2008 has contributed significantly to growth but is expected to wind down as access to grants and concessional financing ends.
- Small and micro middle income countries exhibit long-term growth averaging around 3 to 4 percent (Table 1).

Key historical growth rates (Average Real GDP Growth Rates, Percent, by period for Cabo Verde)
- Cabo Verde: 5.68 percent (1980–2013); 5.74 percent (1980s); 6.15 percent (1990s); 5.28 percent (2000–12); 6.91 percent (2000–07); 2.67 percent (2008–12); 2.47 percent (2008–13)

### Growth accounting and role of TFP
- Growth decomposition follows the Solow framework: output growth = contributions from physical capital, human capital–augmented labor, and the growth residual (total factor productivity, TFP).
- Capital contribution computed via perpetual inventory model with geometric depreciation and income-share weighting.
- Human capital–augmented labor derived from average educational attainment of employed labor and estimated returns to education, weighted by labor income share.
- TFP represents technological progress and efficiency changes and has been relatively small and declining for Cabo Verde in recent years.
- Observed pattern: rising contribution of capital accumulation, small and steady contribution of human capital, fluctuating and declining TFP—TFP decline in the late 2000s coincided with the economic downturn.
- Caveat: TFP, as a residual, can reflect data quality and estimation issues for other components.

Empirical decomposition highlights (from Cabo Verde series)
- TFP contribution has fluctuated with growth and declined in the late 2000s.
- Capital deepening drove much of the earlier high-growth period.

### Cross-country empirical analysis: determinants of TFP growth
Methodologies applied to an unbalanced panel of 33 middle-income countries (1981–2010):
- Dynamic panel regressions (GMM) to control time-invariant country fixed effects.
- Co-integration analysis to identify long-run relationships.
- Panel Probit analysis to identify factors associated with TFP growth.

Data sources:
- Penn World Tables, IMF World Economic Outlook (WEO), World Bank WDI, Economic Freedom of the World (EFW) project, Barro-Lee database.

Principal empirical findings (summary)
- Macroeconomic stability and trade openness are necessary but not sufficient for productivity growth.
- Skill-mismatch has a negative impact on TFP contribution.
- Government debt shows a concave relationship with TFP contribution (public investment can raise productivity but excessive debt risks crowding out efficient private investment).
- FDI, trade openness, and market capitalization are positive determinants of TFP in co-integration analysis.
- High inflation reduces TFP growth.
- Restrictive labor and credit market regulations negatively impact TFP growth; access to credit for SMEs positively impacts TFP growth.
- Panel results indicate some ambiguous and context-dependent effects for credit to GDP, share of agriculture, female labor force participation, and goods market efficiency.

Selected empirical result indicators (as presented)
- Government debt to GDP: (-) or Concave * (short-run); (-) or Concave * (long-run); (-)/(+) or Concave * (panel probit)
- Trade to GDP: (+) (short-run); (+)* (long-run); (-) (panel probit)
- FDI to GDP: (+)(/)(-) * (varies by specification)
- Skill mismatch: (-) * in dynamic panel, cointegration, and panel-probit
- Inflation: (+)/(-) in short-run; (-) * in long-run; (-) * in panel-probit
- Credit market regulation index: (+)(+) * (less restrictive index associated with higher TFP)
- Labor market regulation index: (+) * (less restrictive index associated with higher TFP)
- SMEs with credit line: (+) * (positive in panel-probit)

(Notes: "(+)/(-) indicates ambiguous results; * indicates statistical significance at least at the 10 percent level." A higher regulatory index value implies a less restrictive regulatory system and/or more competitive market.)

### Relevance of findings for Cabo Verde: binding constraints identified
- Skill mismatch
  - Skill mismatch has been relatively high and contributed to high unemployment.
  - Unemployment rate was over 16 percent at end-2013, with youth unemployment more than double that rate.
  - In 2012, there were around 9,300 formal job offers for graduates, compared to around 23,000 young people looking for jobs.
  - GPRSP-III (2012–16) prioritizes technical and vocational training, especially in tourism, agri-business and the creative economy.
  - Funding constraints mean government should encourage more private sector participation in human capital development.

- Labor market inefficiencies
  - World Economic Forum ranked Cabo Verde 129th out of 148 countries on labor market efficiency in its 2013/14 Competitiveness Report.
  - Economic Freedom of the World labor regulation indicators show Cabo Verde’s labor market is more restrictive than other SSA SMICs, notably in hiring and wage-setting regulations, hour regulations and dismissal costs.
  - A new labor code is expected to provide more flexibility in working hours, disciplinary measures and redundancy costs.

- Business environment and SME finance
  - Large informal sector suggests supporting entrepreneurship and self-employment is important for employment and productivity.
  - WEF identifies access to financing as a major obstacle to doing business in Cabo Verde.
  - GPRSP-III proposes strengthening access to financing for local entrepreneurs and SMEs, encouraging cooperative behavior, and providing business support infrastructure.

- Public debt and public investment efficiency
  - Since 2008, Cabo Verde’s public debt has increased by nearly 40 percentage points of GDP, reaching an estimated 95 percent of GDP at end-2013.
  - The increase largely reflects a large public investment program focused on reducing bottlenecks in energy and transportation—expected to have positive productivity effects.
  - With infrastructure gaps addressed and concessional financing likely to end, further productivity gains may depend more on improving efficiency of public investment rather than further increasing its scale.
  - Reducing the government’s draw on domestic financing can free financing space for private sector investment in innovation and growth.

### Policy recommendations and priority reforms
- Reduce skill mismatch and improve quality and relevance of education and training
  - Focus on technical and vocational training linked to key sectors (tourism, agri-business, creative economy).
  - Encourage greater private sector participation in human capital development to address funding constraints.

- Ease regulatory burdens in the labor market
  - Implement labor code reforms to increase flexibility in working hours, disciplinary measures, and redundancy costs to bolster competitiveness and job creation.

- Foster an enabling business environment for local entrepreneurs and SMEs
  - Improve access to finance for SMEs and entrepreneurs (strengthen SME financing, encourage cooperative financing mechanisms).
  - Expand training programs in entrepreneurial skills and innovation; provide business support infrastructure.

- Enhance efficiency of public investment
  - Shift focus from further large-scale public investment to improving the efficiency and value-for-money of public spending and investments.
  - Reduce the public sector’s crowding-out of domestic finance to create room for private sector investment.

### Conclusion
- Boosting productivity (TFP) is essential for Cabo Verde to achieve sustainable growth and continue its transition toward upper middle income status.
- Reforms that are particularly relevant include: reducing skill mismatch, easing regulatory burdens in the labor market, creating an enabling environment for entrepreneurs and SMEs, and enhancing the efficiency of public investment.
- The GPRSP-III contains many initiatives aligned with these priorities; steady progress in implementing them would help raise TFP and advance the country toward upper MIC status.

*Source: Appendix I. Raising Potential Growth in Cabo Verde (IMF staff summary from the provided content).*

### Chapter 6 of a book entitled “Building a Common Future in Southern Africa”, International

### _cr14296 - Chapter 6 of a book entitled “Building a Common Future in Southern Africa”, International

### Background
- Over the last five years, Cabo Verde’s public debt increased significantly, reflecting a sharp decline in revenue and grants, and the ramping up of public investment.
- The DSA uses official debt stock data for end-2012 and additional information available as of April 2014; fiscal outturn of 2013 and staff fiscal projections for 2014–17 are used to project debt-creating flows.
- Debt data include central government external and domestic debt, and external debt contracted by the central government on behalf of state-owned enterprises ("onlending"); data do not include debt contracted directly by SOEs and local governments that carry a central-government guarantee—at end-2012 this was estimated at about 4 percent of GDP.
- Private external debt: estimated around 36 percent of GDP at end-2013 based on balance of payments information.
- Public debt path:
  - Stock of public debt reached 90 percent of GDP in 2012.
  - Estimated to have reached 98 percent of GDP at end-2013.
- Text Table 1 (stock of total public debt at end-year, 2004–13), key values (percent of GDP):
  - External debt: 50.1 (2004), 74.0 (2013)
  - Domestic debt: 33.7 (2004), 23.6 (2013)
  - Total public debt: 83.7 (2004), 97.6 (2013)
- External public debt is overwhelmingly concessional; multilateral institutions (World Bank Group and African Development Bank) are main external creditors.
- External debt profile (2012) averages:
  - Percent of total external debt: Multilateral 52; Bilateral 24; Commercial 24
  - Average grace period: Multilateral 93; Bilateral 71; Commercial 10
  - Average amortization period: Multilateral 341.0%; Bilateral 171.2%; Commercial 201.7% (values reported as in source)
  - Average interest rate: (values presented in source table)
- Domestic public debt remained relatively low: 24 percent of GDP at end-2013.
  - Legal limit of 3 percent of GDP on domestic financing of the deficit per year.
  - At end-2012 the National Pension Fund held about 44 percent of domestic debt; the rest held by banking system.
  - Treasury bonds make up about 94 percent of domestic debt.
  - Average maturity of domestic debt at end-2013: six years.
  - Average interest rate on domestic debt at end-2013: 5.4 percent.
- Policy performance:
  - CPIA averaged 4 (scale 1–6) during 2010–12, making Cabo Verde a strong policy performer.
  - Corresponding external public debt burden thresholds (for strong policy performers): PV of external debt percent of GDP 50; percent of exports 200; percent of revenue 300. External debt service percent of exports 25; percent of revenue 22.

### Baseline scenario and macroeconomic assumptions
- Current baseline vs. 2012 DSA:
  - Medium- and long-term growth projections are about one percentage point lower than in previous DSA.
  - Growth estimated considerably weaker in 2012 and 2013.
  - Baseline assumes slower fiscal consolidation given delayed economic recovery and higher current account deficit due to slower phasing out of the PIP.
- Text Table 4: Assumptions for key economic indicators, 2012–17 (percent of GDP / growth)
  - Real GDP growth (Current DSA): 2012 1.2; 2013 0.5; 2014 3.0; 2015 3.5; 2016 4.0; 2017 4.0
  - Real GDP growth (2012 Article IV DSA): 2012 4.3; 2013 4.1; 2014 4.5; 2015 4.7; 2016 5.0; 2017 5.0
  - Fiscal balance (including grants) (Current DSA): 2012 -9.9; 2013 -7.8; 2014 -7.4; 2015 -6.5; 2016 -5.7; 2017 -4.5
  - Fiscal balance (including onlending) (Current DSA): 2012 -13.6; 2013 -12.9; 2014 -11.8; 2015 -10.5; 2016 -9.4; 2017 -6.6
  - Current account deficit (including grants) (Current DSA): 2012 -11.3; 2013 -4.5; 2014 -9.8; 2015 -10.7; 2016 -11.3; 2017 -10.8
- Box 1: Macroeconomic assumptions, 2013–33:
  - Real GDP growth: pick up after 2012–13 slowdown, settle at 4 percent per year in long term.
  - Fiscal policy: medium term (2013–17) fiscal deficit and overall financing needs expected to decline by 2.8 and 6.3 percentage points of GDP, respectively; long run (2018–33) financing needs projected to stay below 2.5 percent of GDP per year.
  - Non-interest current account deficit: projected to widen in 2014, then decline gradually as PIP winds down.
  - Consumer price inflation projected to remain below 3 percent.
  - Financing: concessionality of new external loans will decline significantly starting from 2019; baseline assumes a slightly more accelerated move towards non-concessional financing than previous DSA.
  - Baseline assumes domestic financing remains below 3 percent of GDP (limit in Budget Law).

### External public debt (DSA results and vulnerabilities)
- Baseline projections:
  - PV of public and publicly guaranteed (PPG) external debt expected to peak at 49 percent of GDP in 2016, then decline to 28 percent of GDP in 2033.
  - Large increase in PV of PPG external debt in 2013–14 due to high public investment.
- Stress tests and sensitivity:
  - Debt sustainability most sensitive to a one-time depreciation shock:
    - A bound test with a 30 percent nominal depreciation shock in 2014 would cause the PV debt-to-GDP ratio to exceed the threshold in 2014 and remain above it for more than a decade.
  - PV of debt-to-exports ratio would breach threshold under: hardening of financial terms, export shock, and a GDP deflator shock.
- Contingent liabilities from SOEs:
  - At end-2012, SOEs’ debt that did not carry a government guarantee amounted to 12 percent of GDP.
  - In a scenario where central government must take on all such debt (transfer of CV$ 18.2 billion recorded end-2012 to central government in 2014), and respecting legal limits on domestic debt financing, the PV of PPG external debt reaches the 50 percent threshold under the baseline.
  - Scenario assumptions: SOE non-guaranteed debt held steady in 2013 at CV$ 18.2 billion; entire stock transferred to central government in 2014; assumed average original maturity 7 years implies government would need to refinance over 2014–19, financing from domestic borrowing (up to legally binding limit 3 percent of GDP) and the remainder from external borrowing.

### Total public debt and stress scenarios
- Baseline projection:
  - Total public debt peaks at 108 percent of GDP in 2016, then declines gradually over projection period.
- Vulnerabilities:
  - Prolonged economic slowdown, delay in Euro zone recovery (affecting remittances and tourism), and realization of contingent liabilities from SOEs are key downside risks.
  - Remittances: roughly 10 percent of GDP in 2013; potential financial stability risks if emigrants reassess investments due to banking problems.
  - SOE financial positions: ELECTRA improved in 2013; TACV remained in difficult circumstances.
- Stress test outcomes:
  - Expansion of public debt most pronounced under scenario that keeps primary balance the same as in 2013.
  - Significantly lower growth for a prolonged period would also cause public debt to reach unsustainable levels.

### Comparison with previous DSA
- PV of external debt does not breach threshold under current baseline (as in previous DSA), but public debt peaks at a higher level:
  - Previous DSA peak public debt: 92 percent of GDP (in 2015).
  - Current DSA peak public debt: 108 percent of GDP (in 2016).
- Deterioration reflects weaker economic growth and slower fiscal consolidation.
- Improvement in assessment of PV external debt relative to threshold is due to increase in discount rate from 3 to 5 percent.

### Authorities’ views
- Authorities broadly concurred with DSA results but noted upside risks:
  - Large-scale public investment program improves infrastructure, addressing bottlenecks to growth, which could bolster domestic revenue and raise growth, improving debt indicators.

### Debt distress classification and conclusions
- Based on external debt burden indicators, debt is assessed as sustainable and risk of debt distress is "moderate."
- Under baseline scenario, none of the debt burden thresholds is breached over the 20-year projection period.
- The depreciation shock is the single shock to which debt sustainability is most sensitive.

*Source: Chapter 6, “Building a Common Future in Southern Africa”, International Monetary Fund, staff report and joint IDA/IMF Debt Sustainability Analysis (May 14, 2014).*

### 16.      However, the rapid accumulation of public debt has increased risks to the baseline,

### _cr14296 - 16.      However, the rapid accumulation of public debt has increased risks to the baseline,

### Key findings on risks and vulnerabilities
- Rapid accumulation of public debt has increased risks to the baseline and points to elevated vulnerabilities.
- Uncertainties and downside risks:
  - Degree (and timing) of the impact of the public investment program on growth remains uncertain.
  - Prospects for export diversification are challenging.
  - SOEs remain in financial difficulties.
- Recommendation summary:
  - Further efforts should be made to accelerate fiscal consolidation and reduce public debt faster.
  - The government should aim to limit its external borrowing to concessional loans.

### Debt indicators and projections (selected figures from DSA tables and charts)
- Public sector debt (percent of GDP): 73.0 (2010); 77.8 (2011); 90.2 (2012); projections show 85.2 (2023) and 63.5 (2033).
- Public and publicly guaranteed (PPG) external debt (percent of GDP): 51.3 (2010); 56.1 (2011); 67.5 (2012); 74.0 (2013); 79.2 (2014); 81.9 (2015); 82.0 (2016); 80.5 (2017); 76.5 (2018); 62.5 (2023); 37.7 (2033).
- Change in public sector debt: 8.4 (2010); 4.8 (2011); 12.4 (2012); 7.4 (2013); 6.5 (2014); 3.3 (2015); 1.0 (2016); -0.9 (2017); -6.1 (2018); -2.6 (2023); -2.1 (2033).
- Identified debt-creating flows: 14.4 (2010); 6.8 (2011); 11.5 (2012); 7.7 (2013); 5.8 (2014); 3.1 (2015); 0.8 (2016); -1.1 (2017); -6.4 (2018); -2.9 (2023); -2.4 (2033).
- Primary deficit (percent of GDP): 9.8 (2010); 9.7 (2011); 11.7 (2012); 4.4 (2013); 4.6 (2014); 11.2 (2015); 9.5 (2016); 8.2 (2017); 6.6 (2018); 4.6 (2023); -0.4 (2033).
- Revenues and grants (percent of GDP): 27.9 (2010); 25.6 (2011); 23.0 (2012); 23.7 (2013); 25.5 (2014); 24.7 (2015); 25.1 (2016); 25.4 (2017); 25.3 (2018); 23.8 (2023); 23.5 (2033).
- Primary (noninterest) expenditure (percent of GDP): 37.7 (2010); 35.3 (2011); 34.7 (2012); 34.9 (2013); 35.0 (2014); 32.9 (2015); 31.7 (2016); 30.1 (2017); 24.9 (2018); 24.8 (2023); 23.4 (2033).
- PV of public sector debt (percent of GDP): 60.9 (2013); 66.2 (2014); 70.7 (2015); 73.3 (2016); 74.8 (2017); 75.3 (2018); 71.6 (2023); 65.2 (2033); 54.0 (2019-33 average).
- PV of PPG external debt (in Billions of U.S. dollars): 0.7 (2010); 0.8 (2011); 1.0 (2012); 1.1 (2013); 1.2 (2014); 1.3 (2015); 1.3 (2016); 1.7 (2017); 2.1 (2018).
- Debt service-to-revenue and grants ratio (in percent): 18.6 (2010); 20.5 (2011); 26.5 (2012); 28.6 (2013); 33.7 (2014); 35.7 (2015); 31.7 (2016); 31.3 (2017); 29.8 (2018); 40.6 (2023); 47.5 (2033).
- Debt service-to-revenue ratio (in percent): 23.9 (2010); 23.2 (2011); 28.8 (2012); 31.8 (2013); 38.1 (2014); 38.5 (2015); 33.8 (2016); 32.9 (2017); 31.3 (2018); 42.2 (2023); 48.4 (2033).
- Gross financing need (percent of GDP): 15.0 (2010); 15.0 (2011); 17.8 (2012); 18.0 (2013); 18.1 (2014); 17.0 (2015); 14.5 (2016); 12.6 (2017); 7.2 (2018); 10.7 (2023); 11.1 (2033).

### Stress tests and sensitivity analysis (highlights)
- PV of debt-to-GDP ratio (selected scenarios, percent):
  - Baseline: 43 (2013); 46 (2014); 48 (2015); 48 (2016); 48 (2017); 47 (2018); 43 (2023); 28 (2033).
  - A2. New public sector loans on less favorable terms in 2013-2033: 24 (2013); 34 (2014); 95 (2015); 45 (2016); 56 (2017); 57 (2018); 65 (2023); 54 (2033).
  - B6. One-time 30 percent nominal depreciation relative to the baseline in 2014: 43 (2013); 65 (2014); 68 (2015); 69 (2016); 69 (2017); 67 (2018); 61 (2023); 41 (2033).
- PV of debt-to-exports ratio (selected scenarios, percent):
  - Baseline: 95 (2013); 101 (2014); 110 (2015); 103 (2016); 102 (2017); 99 (2018); 38 (2023); 153 (2033).
  - A2 (less favorable financing): 295 (2013); 109 (2014); 115 (2015); 118 (2016); 117 (2017); 111 (2018); 103 (2023); 82 (2033).
  - B6 (30 percent depreciation): 95 (2013); 102 (2014); 104 (2015); 104 (2016); 101 (2017); 95 (2018); 84 (2023); 55 (2033).
- PV of debt-to-revenue ratio (selected scenarios, percent):
  - Baseline: 199 (2013); 203 (2014); 209 (2015); 206 (2016); 200 (2017); 194 (2018); 185 (2023); 122 (2033).
  - A2 (less favorable financing): 219 (2013); 192 (2014); 192 (2015); 342 (2016); 382 (2017); 372 (2018); 323 (2023); 189 (2033).
  - B6 (30 percent depreciation): 199 (2013); 287 (2014); 295 (2015); 293 (2016); 285 (2017); 276 (2018); 268 (2023); 178 (2033).
- Debt service-to-exports and debt service-to-revenue ratios show large increases under adverse scenarios and bound tests (tables provide detailed year-by-year percent outcomes across scenarios).

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent): 1.5 (2010); 4.0 (2011); 1.2 (2012); 4.9 (2013); 3.5 (2014); 0.5 (2015); 3.0 (2016); 3.5 (2017); 4.0 (2018); 4.0 (2023); 4.0 (2033).
- GDP deflator in US dollar terms (change in percent): -4.3 (2010); 7.7 (2011); -5.8 (2012); 5.4 (2013); 8.8 (2014); 5.9 (2015); 5.6 (2016); 4.4 (2017); 3.8 (2018); 4.1 (2023); 4.0 (2033).
- Effective interest rate (percent): 5.7 (2010); 4.7 (2011); 3.3 (2012); 3.7 (2013); 1.4 (2014); 1.7 (2015); 1.9 (2016); 2.1 (2017); 2.2 (2018); 2.3 (2023); 2.3 (2033).
- Growth of exports of G&S (US dollar terms, in percent): 12.2 (2010); 23.0 (2011); -1.0 (2012); 15.6 (2013); 15.9 (2014); 8.6 (2015); 10.1 (2016); 10.8 (2017); 10.6 (2018); 11.0 (2023); 11.6 (2033).
- Growth of imports of G&S (US dollar terms, in percent): 2.3 (2010); 23.6 (2011); -15.1 (2012); 11.8 (2013); 16.4 (2014); -3.8 (2015); 15.4 (2016); 11.9 (2017); 8.5 (2018); 6.6 (2023); 6.6 (2033).
- Grant element of new public sector borrowing (in percent): 42.6 (2016); 46.0 (2017); 45.7 (2018); 45.0 (2019); 44.9 (2020); 43.9 (2021); 44.7 (2022); 28.4 (2023); 18.2 (2033).
- Government revenues (excluding grants, in percent of GDP): 21.7 (2010); 22.7 (2011); 21.2 (2012); 21.3 (2013); 22.6 (2014); 22.9 (2015); 23.5 (2016); 24.1 (2017); 24.1 (2018); 22.9 (2023); 23.0 (2033).
- Aid flows (Billions of US dollars): 0.3 (2010); 0.3 (2011); 0.3 (2012); 0.3 (2013); 0.3 (2014); 0.3 (2015); 0.2 (2016); 0.2 (2017); 0.1 (2018); 0.1 (2023); 0.0 (2033).
  - Of which: Grants: 0.1 (2010); 0.1 (2011); 0.0 (2012); 0.0 (2013); 0.1 (2014); 0.0 (2015); 0.0 (2016); 0.0 (2017); 0.0 (2018); 0.0 (2023); 0.0 (2033).
  - Of which: Concessional loans: 0.2 (2010); 0.2 (2011); 0.2 (2012); 0.2 (2013); 0.2 (2014); 0.2 (2015); 0.2 (2016); 0.2 (2017); 0.1 (2018); 0.1 (2023); 0.0 (2033).

### Policy recommendations and implications
- Accelerate fiscal consolidation to reduce public debt faster given elevated vulnerabilities and downside risks.
- Limit external borrowing to concessional loans to mitigate debt-service and refinancing vulnerabilities.
- Address SOE financial difficulties to reduce contingent liabilities and improve fiscal outcomes.
- Monitor outcomes of public investment program closely given uncertain growth payoff and timing.

*Sources: Country authorities; and staff estimates and projections contained in the IMF Staff Report tables and figures.*

### 2008. The 2008 assessment was conducted at the request of the authorities regarding the Policy

### _cr14296 - 2008. The 2008 assessment was conducted at the request of the authorities regarding the Policy

### Safeguards assessment and central bank governance
- 2008 assessment requested by the authorities regarding the Policy Support Instrument (PSI).
- Findings:
  - The BCV had adopted some of the measures recommended in 2002.
  - Safeguards vulnerabilities remained, notably in:
    - the internal audit mechanism,
    - the system of internal controls,
    - transparency practices.
- Implementation and follow-up:
  - Implementation of certain safeguards recommendations remains work in progress.
  - The BCV has since improved the completion of audits and the publication of audited financial statements on its website.

### Exchange rate arrangements
- De facto and de jure arrangement: conventional fixed peg.
- Peg details:
  - The escudo has been pegged to the euro at a rate of CVE 110.265 per euro since January 4, 1999.
- International obligations:
  - Cabo Verde accepted the obligations of Article VIII of the Articles of Agreement effective July 1, 2004.
  - It maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

### Previous Article IV Consultation and PSI reviews
- Final review under the 15-month PSI for Cabo Verde completed on January 30, 2012 (Country Report No. 12/29).
- The Executive Board concluded the 2012 Article IV consultation on March 8, 2013 (Country Report No. 13/52).

### Technical assistance (since 2004) — FAD, LEG, MCM, STA activities and purposes
- FAD:
  - June 2004: Help the authorities move to a VAT, rationalize the import tariff, and overhaul the 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.
  - March 2009: Rationalization of fiscal benefits.
  - July 2012: Review tax policy and exemptions.
  - September 2012: Diagnostic evaluation of tax administration.
  - November 2012: Tax administration: annual planning.
  - February 2013, and July 2013: Tax administration and policy.
  - April 2013, June 2013, September 2013, January 2014, and February 2014: Tax administration: large taxpayer office organization, human resources, organization, strategic planning, and information technology.
  - October 2013: Program budgeting and other public financial management reforms.
  - November 2013: Medium term debt management strategy.
  - January 2014: Tax policy: small taxpayers.
- LEG:
  - October 2006 and March 2008: Tax legislation.
  - March 2008: AML/CFT initial assessment, and legal drafting.
  - March 2012 and October 2012: Draft the financial and banking system laws.
- MCM:
  - April 2004: Accounting, financial sector regulation, monetary operations, and liquidity management.
  - November 2005, March 2006, June 2006, November 2006, and July 2007: Banking supervision, liquidity management, exchange regime, and reserves management.
  - March 2008: Macro-prudential indicators.
  - November 2008, January 2009, and March 2009: Financial Sector Assessment Program (FSAP), and various follow-up missions on banking supervision.
  - February 2009, September 2009, and October 2013: 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: Medium-Term Debt Strategy Development follow-up.
  - October 2011: Enhancing banking supervision and crisis resolution.
  - September 2012: Enhancing liquidity management and development of the government securities market.
  - March 2013: Enhancing banking supervision and crisis resolution.
  - November 2013: Crisis management and contingency planning.
- STA:
  - November 2003, January 2006, March 2012, July 2013, and April 2014: National accounts.
  - February 2004, and February 2012: Balance of payment statistics.
  - March 2004, April 2006, February 2007, August 2008, and April 2012: Government finance statistics.
  - June 2004, May 2006, and October 2007: Price statistics.
  - March 2007: Monetary statistics and reporting.

### World Bank and IMF collaboration (as of March 31, 2014)
- Ongoing exchange of views on macroeconomic and structural issues; cooperation includes:
  - Article IV Consultations: World Bank representatives attended the Policy Consultation Meeting for the 2014 Article IV mission brief and meetings during the 2014 IMF Article IV mission.
  - Joint managerial action plan: Regular meetings to exchange views; Fund provides macroeconomic framework updates requested by the Bank.
  - Bank program focus areas: poverty reduction, public sector efficiency, competitiveness and private sector development, management of state-owned enterprises (SOEs), tourism development study (completed July 2013), Country Economic Memorandum (completed December 2013).
  - Bank guidance period: Country Partnership Strategy (FY2014–FY2017).
  - Joint work: Close cooperation on public financial management and a joint debt sustainability analysis (DSA).
  - Joint Staff Advisory Note: JSAN prepared on the Third Growth and Poverty Reduction Strategy Paper (GPRSP-III) 2012–16.
- Planned continuation of close cooperation; the Fund leads on macroeconomic analysis and the Bank leads on competitiveness, innovation in the private sector (including agriculture), and SOEs. The teams will cooperate on a joint DSA.

### Joint World Bank and IMF Work Program (as of March 31, 2014) — selected items and timing
- Bank work program (next 12 months):
  - Country Partnership Strategy (CPS) 2014–17: January 2014; Expected delivery Date: May 2014.
  - Eighth Poverty Reduction Support Credit (PRSC – 8) for US$15 million: November 2013; Expected delivery Date: April 2014.
  - Financial Sector Development Strategy: March, May 2014; Expected delivery Date: June 2014.
  - National Investment System: May 2014; Expected delivery Date: TBD.
  - Ninth Poverty Reduction Support Credit (PRSC – 9) for US$10 million: May 2014; Expected delivery Date: TBD.
  - TA Projects for SOEs: May 2014; Expected delivery Date: January 2015.
  - Innovation and Competitiveness: May 2014, TBD; Expected delivery Date: June 2015.
- IMF work program (next 12 months):
  - Article IV Consultation: January 2014; Expected delivery Date: May 2014.
  - Staff Visit: September 2014.
  - Article IV Consultation: February 2015; Expected delivery Date: May 2015.
- Mutual requests for inputs:
  - Fund request to Bank: Updates on SOE reforms and financial situation; Updates on real sector developments (FY2014 and FY2015).
  - Bank request to Fund: Macroeconomic framework updates (FY2014 and FY2015).
- Joint products in the next 12 months:
  - Joint Debt Sustainability Analysis (DSA): Expected delivery Date: May 2014.

*IMF staff report content as provided in the source PDF.*

### 2. Joint Medium-Term Debt Management

### 2. Joint Medium-Term Debt Management Strategy (MTDS) report May 2014

### Statistical issues — overall assessment and capacity
- Cabo Verde assessed as “Category A” with regards to data adequacy for surveillance purposes.
- Participated in the General Data Dissemination System (GDDS) since February 2004; metadata of the monetary and financial sector updated in August 2007.
- Benefited from IMF Statistics Department (STA) technical assistance under the GDDS project for Lusophone Africa.
- Key constraints:
  - Shortage of financial and human resources across the statistical system.
  - INE staff capacity overstretched; comprehensive master plan developed by INE to upgrade statistical agencies and broaden statistics.
  - Full implementation of the 1993 SNA and quarterly national accounts publication require substantial improvement in source data collection.
- INE priorities and actions:
  - Implemented GDP at chained prices per 1993 SNA and changed base year from 1980 to 2007; new national accounts presented in July 2013 for 2011 and backward projections for 2002–2010.
  - Plans to publish quarterly GDP data by 2015.
  - Ambitious program to build statistics series (business, household, labor force, governance, security surveys) and to assess and correct individual source data entries.
  - Recommendation: greater prioritization of data collection and further TA on preliminary estimation/extrapolation methods from random sampling surveys to improve timeliness and accuracy.

### National accounts and price statistics — specifics
- National accounts:
  - Most recent annual GDP data are for 2012 (released in March 2014).
  - Quarterly national accounts publication targeted for 2015, contingent on improved source data and capacity.
- Price statistics:
  - Revamped Consumer Price Index (CPI) launched in February 2008 with new weights and updated commodity basket (previous weights dated to 1989).
  - Price statistics published monthly and in a timely manner.
  - INE received assistance from the National Statistics Institute of Portugal and IMF STA CPI missions during 2006–2007.

### Labor, government finance, monetary, and external statistics — findings and weaknesses
- Labor market statistics:
  - Published only annually with long delays; annual unemployment data for 2012 released in Q2 2013.
  - No published data on wages and employment by sector.
  - Labor force survey covers around 10,000 households, representative at the municipality level.
- Government Finance Statistics (GFS):
  - GFS compilation system being upgraded with TA under GDDS for Lusophone Africa.
  - SIGOF expanded to cover all semiautonomous institutes and most municipalities by end-2007.
  - Recent TA helped compile GFS data in line with GFSM 2001; authorities have started reporting GFS for the GFS Yearbook.
  - Remaining concerns:
    - Statistical discrepancies in fiscal accounts; flows and stocks not always consistent.
    - Tax arrears, overdue tax credits and refunds need better measurement and integration into the budget.
    - Institutional coverage of fiscal data needs extension.
    - Significant delay in donor reporting of project financing affects fiscal accuracy.
    - Weaknesses persist regarding public and publically guaranteed debt of state-owned enterprises despite recent external debt revision.
- Monetary and Financial Statistics:
  - Adequate; quality of the monetary survey improved.
  - STA mission (March 2007) aided Banco de Cabo Verde (BCV) to finalize SRFs; SRF-based monetary data published in IFS Supplement since June 2007.
  - Integrated monetary database meeting STA, AFR, and BCV needs now in place.
- External statistics (Balance of Payments):
  - Accuracy, periodicity, timeliness of BOP statistics improved; greater use of surveys and an International Transactions Reporting System expanded sources and coverage largely aligned with BPM5 recommendations.
  - Remaining limitations in sources and compilation techniques, notably coverage for:
    - Foreign trade in goods.
    - Direct investment.
    - Portfolio investment liabilities.
    - Nonbank sector external transactions via accounts held abroad.
  - Quarterly BOP data dissemination on BCV website regular; regular timely transmission to STA since 2007 for IFS and BOP Yearbook publication.

### Common Indicators Required for Surveillance (As of March 31, 2014) — selected items and frequencies
- Exchange rates: Date of latest observation 03/30/14; Date received 03/31/14; Frequency of data, reporting, publication: D.
- International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 02/28/14; Date received 03/31/14; Frequency of data and reporting: W; Frequency of publication: W.
- Reserve/base money: Date of latest observation 02/28/14; Date received 03/31/14; Frequency data/reporting: D/W; Frequency publication: M.
- Broad money: Date of latest observation 02/28/14; Date received 03/31/14; Frequency data/reporting/publication: M.
- Central bank balance sheet: Date of latest observation 02/28/14; Date received 03/31/14; Frequency data/reporting: D/W; Frequency publication: M.
- Consolidated balance sheet of the banking system: Date of latest observation 02/28/14; Date received 03/31/14; Frequency data/reporting/publication: M.
- Consumer price index: Date of latest observation 02/28/14; Date received 03/18/14; Frequency data/reporting/publication: M.
- Revenue, expenditure, balance, and composition of financing — central government: Date of latest observation 12/31/13; Date received 01/20/14; Frequency data/reporting/publication: A.
- Stocks of central government and central government-guaranteed debt: Date of latest observation 12/31/12; Date received 09/30/13; Frequency data/reporting/publication: A.
- External current account balance; Exports and imports of goods: Date of latest observation 12/31/13; Date received 02/28/14; Frequency data/reporting/publication: Q.
- GDP/GNP: Latest observation 2012; Date received March 2014; Frequency data/reporting/publication: A.
- Gross external debt: Date of latest observation 12/31/12; Date received 09/30/13; Frequency data/reporting: Q; Frequency publication: A.
- International Investment Position: Latest observation 2007; Date received Aug 2008; Frequency data/reporting/publication: A.
- Notes/definitions provided for frequency codes D/W/M/Q/A/I/NA and specific footnotes for reserve assets, interest rates, general government definition, debt composition, and IIP coverage.

### 2014 Article IV Consultation — key findings, projections, and policy recommendations
- Macro developments and vulnerabilities:
  - Output growth slowed from 4 percent in 2011 to 1.2 percent in 2012; staff estimates growth moderated further in 2013 to about 0.5 percent.
  - Tourism performed well; remittances and private capital flows continued to decline; domestic confidence declined.
  - Unemployment rate 16 percent at end-2013; youth unemployment twice as high.
  - Consumer price inflation reached 0.6 percent in March 2014.
  - Current account deficit estimated to have narrowed sharply in 2013; positive overall balance of payments and international reserves increased to roughly 4½ months of prospective imports.
- Financial sector:
  - Banco de Cabo Verde reduced policy rate by 150 basis points in March 2014.
  - Banks well-capitalized but financial stability weakened by slowdown: non-performing loans by end-2013 accounted for 16 percent of total loans; bank profitability declined.
- Fiscal position and public debt:
  - Fiscal deficit fell to 7¾ percent of GDP in 2013, about 2 percentage points less than the year before.
  - Total financing needs (including onlending to state-owned enterprises) remained very large at 13 percent of GDP, causing total public debt to reach an estimated 98 percent of GDP by December 2013.
  - Budget imbalance reflects weaker revenue performance and higher capital expenditure.
- Staff projections:
  - Real GDP growth to pick up to 3 percent in 2014; longer-term growth projected about 4 percent.
  - Inflation expected to increase as activity picks up but remain below 3 percent.
  - Current account deficit expected to widen in 2014 as import demand recovers; likely to remain high for a few more years due to large-scale public investment program being phased out gradually.
  - Principal near-term risks: further delay in European recovery and possible financial stress in the euro area.
  - Domestic risks primarily fiscal given high public debt, mitigated by debt’s high concessionality and long maturity.
- Executive Board recommendations and assessment:
  - Commended economic and social progress and macroeconomic management that strengthened reserves and safeguarded the peg.
  - Encouraged fiscal consolidation to rebuild buffers and faster deficit reduction balanced with protecting growth; safeguard priority social spending and prioritize strategic public investment projects while enhancing efficiency.
  - Supported efforts to bolster domestic revenue mobilization; noted role of Fund TA.
  - Commended actions to strengthen governance and financial performance of state-owned enterprises; encouraged continued efficiency improvements.
  - Agreed that recent monetary loosening is appropriate given slowdown in private sector credit growth and absence of pressures on reserves or prices.
  - Recommended strengthening liquidity management capacity, improve interbank market efficiency, continue developing government securities market, and maintain sufficient international reserve buffers.
  - Supported measures to safeguard financial stability and address non-performing loans, including more intense supervision and new laws strengthening supervisory and regulatory framework; encouraged implementation of remaining recommendations of the 2009 Financial Sector Assessment Program.
  - Noted the escudo remains broadly aligned with fundamentals; called for reforms to bolster competitiveness, create jobs, deliver inclusive growth, improve business climate, increase labor market efficiency, and reduce skill mismatches.
  - Encouraged authorities to prioritize medium-term development plan goals with highest potential economic and social returns.

### Selected economic indicators, 2011–17 — key values and projections
- Real GDP (annual percent change): 2011: 4.0; 2012: 1.2; 2013: 0.5; 2014 (Proj.): 3.0; 2015: 3.5; 2016: 4.0; 2017: 4.0.
- GDP deflator (annual percent change): 2011: 2.7; 2012: 1.9; 2013: 2.5; 2014–2017 (Proj.): 2.5 (each year).
- Consumer price index (annual average): 2011: 4.5; 2012: 2.5; 2013: 1.5; 2014: 2.0; 2015–2017: 2.5 (each year).
- Consumer price index (end of period): 2011: 3.6; 2012: 4.1; 2013: 0.1; 2014–2017: 2.5 (each year).
- Exports of goods and services (annual percent change): 2011: 17.3; 2012: 7.2; 2013: 5.1; 2014: 6.8; 2015: 8.9; 2016: 9.3; 2017: 9.3.
  - Of which: tourism: 2011: 26.5; 2012: 21.4; 2013: 8.6; 2014: 9.5; 2015–2017: 10.3 (each year).
- Imports of goods and services (annual percent change): 2011: 17.9; 2012: -8.1; 2013: -6.9; 2014: 11.9; 2015: 9.9; 2016: 7.2; 2017: 5.0.
- Money and credit (change in percent of broad money, 12 months earlier):
  - Net foreign assets: 2011: -7.7; 2012: 4.6; 2013: 6.9; 2014: 3.5; 2015: 2.2; 2016: 0.2; 2017: 0.5.
  - Net domestic assets: 2011: 12.2; 2012: 1.7; 2013: 4.4; 2014: 3.1; 2015: 8.1; 2016: 9.0; 2017: 7.5.
  - Net claims on the central government: 2011: 4.0; 2012: 3.3; 2013: 1.8; 2014: 1.4; 2015: 1.1; 2016: 1.3; 2017: 1.1.
  - Credit to the economy: 2011: 10.8; 2012: 0.0; 2013: 1.3; 2014: 5.1; 2015: 6.0; 2016: 6.2; 2017: 5.8.
  - Broad money (M2): 2011: 4.6; 2012: 6.3; 2013: 11.3; 2014: 6.6; 2015: 10.3; 2016: 9.2; 2017: 8.0.
- External sector (percent of GDP):
  - External current account (including official transfers): 2011: -16.3; 2012: -11.3; 2013: -4.5; 2014: -9.1; 2015: -10.8; 2016: -10.9; 2017: -9.2.
  - External current account (excluding official transfers): 2011: -20.0; 2012: -14.6; 2013: -7.5; 2014: -10.7; 2015: -12.4; 2016: -12.2; 2017: -10.5.
  - Overall balance of payments (percent of GDP): 2011: -2.7; 2012: 2.7; 2013: 3.5; 2014: 3.2; 2015: 2.2; 2016: 0.6; 2017: 0.8.
  - Gross international reserves (months of prospective imports): 2011: 3.5; 2012: 4.2; 2013: 4.4; 2014: 4.6; 2015: 4.6; 2016: 4.5; 2017: 4.4.
- Government finance (percent of GDP):
  - Revenue: 2011: 25.6; 2012: 23.0; 2013: 23.7; 2014: 25.5; 2015: 24.7; 2016: 25.1; 2017: 25.4.
  - Tax and nontax revenue: 2011: 22.7; 2012: 21.2; 2013: 21.3; 2014: 22.6; 2015: 22.9; 2016: 23.5; 2017: 24.1.
  - Grants: 2011: 2.9; 2012: 1.8; 2013: 2.4; 2014: 2.9; 2015: 1.8; 2016: 1.6; 2017: 1.3.
  - Expenditure: 2011: 33.3; 2012: 32.9; 2013: 31.5; 2014: 32.9; 2015: 31.2; 2016: 30.8; 2017: 30.0.
  - Overall balance (incl. grants): 2011: -7.7; 2012: -9.9; 2013: -7.8; 2014: -7.4; 2015: -6.5; 2016: -5.7; 2017: -4.6.
  - External financing: 2011: 6.0; 2012: 7.5; 2013: 6.2; 2014: 5.7; 2015: 4.7; 2016: 3.5; 2017: 2.6.
  - Domestic financing: 2011: 1.6; 2012: 2.3; 2013: 1.6; 2014: 1.7; 2015: 1.8; 2016: 2.2; 2017: 2.0.
  - Onlending: 2011: -3.6; 2012: -3.7; 2013: -5.4; 2014: -4.3; 2015: -4.0; 2016: -3.2; 2017: -2.3.
  - Total financing (incl. onlending): 2011: 11.2; 2012: 13.6; 2013: 13.2; 2014: 11.7; 2015: 10.4; 2016: 8.9; 2017: 6.9.
- Public debt stock and service:
  - Total nominal government debt (percent of GDP): 2011: 77.8; 2012: 90.2; 2013: 97.6; 2014: 104.1; 2015: 107.4; 2016: 108.4; 2017: 107.5.
  - External government debt (percent of GDP): 2011: 56.1; 2012: 67.5; 2013: 74.0; 2014: 79.2; 2015: 81.9; 2016: 82.0; 2017: 80.5.
  - Domestic government debt (percent of GDP): 2011: 21.6; 2012: 22.6; 2013: 23.6; 2014: 24.9; 2015: 25.5; 2016: 26.4; 2017: 27.0.
  - External debt service (percent of exports of goods and services): 2011: 4.1; 2012: 4.3; 2013: 4.6; 2014: 4.5; 2015: 4.5; 2016: 4.4; 2017: 4.1.
  - Present value of external debt (percent of GDP): 2013: 42.6; 2014: 45.8; 2015: 47.8; 2016: 48.5; 2017: 48.2.
  - Present value of external debt (percent of revenue): 2013: 199.5; 2014: 203.0; 2015: 208.7; 2016: 205.9; 2017: 199.9.
  - Present value of external debt (percent of exports): 2013: 95.0; 2014: 101.2; 2015: 102.9; 2016: 101.8; 2017: 98.8.
- Memorandum items:
  - Nominal GDP (billions of Cabo Verde escudos): 2011: 147.9; 2012: 152.6; 2013: 157.2; 2014: 166.0; 2015: 176.2; 2016: 187.9; 2017: 200.3.
  - Gross international reserves (€ millions, end of period): 2011: 263.3; 2012: 299.3; 2013: 347.5; 2014: 395.9; 2015: 431.2; 2016: 440.6; 2017: 454.9.
- Sources: Cabo Verdean authorities; and IMF staff estimates and projections.
  - Footnotes: Last national accounts data for 2012; adjustments for data inconsistency in December 2011; public debt data for 2013 are preliminary estimates.

*Source: _cr14296 - 2. Joint Medium-Term Debt Management Strategy (MTDS) report, May 2014.*

### 1.      The Cabo Verdean authorities are thankful to staff for their constructive cooperation and

### The Cabo Verdean authorities are thankful to staff for their constructive cooperation and

### Introduction / Overview
- The authorities appreciate staff for their constructive cooperation and dialogue during the Article IV mission.
- The process allowed exchange of views on a broad range of topics to refine the authorities’ macroeconomic objectives during Cabo Verde’s transition from low to middle-income status.
- Cabo Verde is pursuing reforms and completing the public investment program (PIP) to accelerate growth by increasing productivity and competitiveness, fostering economic diversification, and developing human capital.
- Authorities prioritize enhancing financial supervision, improving debt management and strengthening tax administration, with Fund technical assistance (TA) playing an instrumental role.

### Economic developments and outlook
- Recent performance:
  - The economy decelerated in the last two years due to a difficult external environment, including a decline in remittances and foreign direct investment (FDI) originating from Europe.
  - In 2013, according to staff, GDP is estimated to have grown by 0.5 percent. If confirmed, this growth rate would be the lowest since 1990.
  - Support to domestic demand by the PIP was crucial; an outright recession could have occurred in 2013 had the government pursued fiscal consolidation at a faster pace.
- External accounts and reserves:
  - Current account deficit declined from 16.3 percent of GDP in 2011 to an estimated 4.5 percent of GDP in 2013, linked mainly to strong services performance (especially tourism) and reduced imports from re-phasing of the PIP.
  - The overall balance of payments moved into surplus in 2012 and 2013 and is expected by staff to remain in positive territory until 2017.
  - At end-2013, gross international reserves held by Banco de Cabo Verde (BCV) reached the equivalent of 4.4 months of prospective imports, the midpoint of the Fund’s estimated optimal range for Cabo Verde.
  - In the last Article IV report, staff projected reserve coverage for 2013 at 3.3 months of prospective imports.
- Outlook:
  - For 2014 and beyond, GDP growth is expected to accelerate as remittances and FDI gradually recover and the impact of the PIP on productivity and competitiveness increases.
  - Cabo Verde’s economic activity is concentrated in three of the nine inhabited islands: Santiago, Sal and Boa Vista.
  - A main objective of the PIP is to overcome infrastructural bottlenecks and enhance integration between the islands to create synergies across sectors.

### Fiscal policy
- Structural perspective:
  - Cabo Verde has a long record of sound macroeconomic management and recognizes the need to pursue fiscal consolidation.
  - The ordinary or current budget balance — proxied by the overall balance excluding public investment — was in surplus in 2013 to the amount of 1.3 percent of GDP (see Table 3b of the staff report).
  - Public investment (net acquisition of non-financial assets) corresponded to 9.1 percent of GDP in 2013.
  - The central government’s overall deficit was 7.8 percent of GDP in 2013.
  - Current expenditures (wages, goods and services, subsidies, transfers, social benefits and interest) decreased as a share of GDP from 28.3 percent in 2000 to 22.4 percent in 2012 and 2013.
- Medium-term consolidation:
  - Even including public investment, a trend toward medium-term fiscal consolidation is observable since the PIP peaked in 2012.
  - The overall deficit of the central government dropped from 9.9 percent of GDP in 2012 to 7.8 percent in 2013.
  - Projected overall deficits: 7.4 percent in 2014 and a gradual decline to 4.6 percent in 2017.
  - Staff’s forecasts are based on expenditure plans in the original 2014 budget and the Medium-Term Fiscal Framework (MTFF); authorities argue actual fiscal performance is often less expansionary than originally envisaged due to budgetary rules.
  - The approved budget includes a provision stipulating that as much as 30 percent of several classes of expenditures can only be executed if revenues perform as expected.
  - Authorities are reviewing 2014 budget execution to reduce expenses in response to weaker revenue performance observed in the first quarter; expenditures projected in the MTFF for 2015–17 are also being reduced accordingly.
- Revenue and tax administration:
  - In 2013, measures continued with Fund TA to broaden the tax base, enhance tax collection, and strengthen the institutional and administrative capacities of the General Directorate for Contributions and Taxes (Direção Geral de Contribuições e Impostos – DGCI).
  - Authorities believe the full impact of these measures will materialize in the course of the current year.
  - Harmonization of value-added tax (VAT) rates was approved in 2012; a loophole in the original law allowed major tourism operators to pay old rates on tourist packages during 2013 if contracts were signed in 2012.
  - The VAT law used the date contracts were signed as the basis for determining the rate to be applied, enabling tourism operators to anticipate signatures to 2012 for packages sold in 2013.
- State-owned enterprises (SOEs):
  - Of the six largest SOEs, four have improved performance; two remain under distress: Electra and TACV (Transportes Aéreos de Cabo Verde).
  - Reforms are showing positive results: preliminary 2013 data indicate Electra’s operational losses decreased by half compared to 2012.
  - TACV measures (sale of baggage handling branch, streamlining routes and fleet, managerial improvements) have contained losses and the company is expected to break even in 2015.

### Debt sustainability
- Financing strategy and characteristics:
  - Authorities intend to finalize a strategy to harness concessional financing available to ramp up public investment in infrastructure and social projects over the next few years.
  - This policy resulted in a rapid increase in public external debt under very favorable conditions.
  - Interest rates on this external public debt average 1.1 percent; over 92 percent of the total is mostly fixed; amortization and grace periods are very long.
  - Multilateral debt represents over 50 percent of total external debt, with an average grace period of 9 years and an average amortization period of 34 years (Text Table 2 of the Debt Sustainability Analysis (DSA)).
  - External public debt does not breach any indicative threshold under the DSA baseline.
- Policy stance and messaging:
  - Financing infrastructure through concessional rather than non-concessional resources has distinct implications; authorities argue staff focuses excessively on debt-to-GDP ratios and underplays concessionality.
  - Authorities contend that had Cabo Verde not increased investment during the post-graduation window, financing the same infrastructure would have been more costly.
  - Completion of the PIP is expected to underpin higher future growth and enhance capacity to pay debt.
  - Staff considers public and publicly guaranteed debt sustainable in the DSA, but authorities note that this conclusion is not reflected prominently in the main report or staff appraisal, which emphasize debt-related risks despite concessional debt characteristics.
- Additional statistic:
  - External public debt accounts for 76 percent of Cabo Verde’s total public debt.

### Monetary policy and financial sector
- Monetary policy actions and outcomes:
  - In 2013 monetary policy kept inflation low and supported the exchange rate peg with the euro.
  - With increased international reserves and controlled inflation, BCV eased monetary policy to support recovery per staff advice.
  - BCV cut the policy rate by 150 basis points — to 4.25 percent — last March, and reduced the rates of rediscount and of the lending facility by the same amount, to 8.25 and 7.25 percent, respectively.
- Reserve requirements and liquidity:
  - Staff recommended lowering the 18 percent minimum reserve requirement (MRR), arguing it is high versus peers and that a decrease would free liquidity and support credit creation.
  - BCV considers 18 percent MRR adequate given its dual monetary and prudential role and argues reserve requirements should not be changed frequently.
  - Authorities find staff’s arguments for lowering the MRR unconvincing, noting high excess liquidity and limited potential effect on credit from freeing up bank reserves; lowering MRR could complicate liquidity management.
- Banking sector health and reforms:
  - BCV measures to address non-performing loans (NPLs) could increase credit to the private sector: BCV reviewed banks’ NPL provisioning and disclosure practices and requested strict adherence to International Financial Reporting Standards (IFRS) definitions.
  - The level of NPLs has started to fall but remains high at 16 percent.
  - The banking sector remains well capitalized and liquid; foreign banks are fully funded by domestic deposits and do not depend on parent institutions.
  - BCV is committed to completing the implementation of the 2009 FSAP recommendations.
  - Future BCV priorities include refining its operational framework to raise transmission efficiency and promote development of the interbank market.

*IMF staff report — Cabo Verde Article IV mission (excerpts).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14296.pdf_