## _cr16366 ## Source details **Canonical URL:** [_cr16366](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16366.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16366.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16366.pdf.json) --- ### Recent developments and macroeconomic performance - Real GDP growth: 1.9 percent in 2014 and 1.5 percent in 2015; recovery in H1 2016: 5.9 percent (Q1) and 3.6 percent (Q2). - Unemployment: declined to 12.4 percent; youth unemployment 28.6 percent. - Inflation: consumer price inflation averaged 0.1 percent for 2015; average inflation projected about -1.6 percent in 2016; CPI annual averages: 2.5 (2012), 1.5 (2013), -0.2 (2014), 0.1 (2015), -1.6 (2016, Prel.), 0.8 (2017, proj.), 1.6 (2018, proj.), 2.0 (2019, proj.), 2.0 (2020, proj.). - External sector and reserves: - Current account deficit: estimated 4.25 percent of GDP in 2015; external current account (including grants) reported as -4.3 percent of GDP in 2015. - International reserves: increased to about 5.75 months of prospective imports; alternative reporting notes 5.8 months of prospective imports for 2015; gross international reserves (end-period, € millions): 453 (2015), 484 (2016), 506 (2017, proj.), 517 (2018, proj.), 526 (2019, proj.), 522 (2020, proj.). - Tourism, remittances, and FDI: - Tourism recovered in 2014 and continued strong growth into H1 2016; tourist arrivals grew by 16 percent (H1 2016). - Remittances remained robust (remittances ~12 percent of GDP in 2015). - FDI slowed in 2014 but accelerated in H1 2016; tourism-related FDI pipeline: signed projects worth €625 million (42 percent of 2016 GDP); further projects worth some €700 million under discussion. - Banking sector and NPLs: - NPLs peaked at 22.4 percent in August 2014 (also reported as 22.3 percent mid-2014) and declined to 16.9 percent in June 2016 (16.5 percent at end-2015). - Capital adequacy: regulatory capital to risk-weighted assets 14.8 percent (Jun-16). - Provisions to NPLs about 53 percent (53.1 percent Jun-16; 54.4 percent in 2015). ### Fiscal position, financing, and public debt - Fiscal outcomes (2015): - Fiscal deficit fell to 4.1 percent of GDP in 2015 (overall balance incl. grants: -4.1 percent of GDP). - Revenue rose to 26.2 percent of GDP in 2015; tax and nontax revenue 23.8 percent of GDP; grants 2.4 percent of GDP; expenditure 30.4 percent of GDP. - Total financing needs (including onlending to SOEs) 8.3 percent of GDP in 2015 (declined by 2.3 percentage points from 2014). - Public debt stock: - Total public debt estimated 125.8 percent of GDP by end-2015; total nominal government debt series: 91.1 (2012), 102.5 (2013), 114.5 (2014), 125.8 (2015), 129.1 (2016, Prel.), 130.2 (2017, proj.), 128.5 (2018, proj.), 124.7 (2019, proj.), 118.6 (2020, proj.). - SOE contingent liabilities and fiscal risks: - Contingent liabilities increased to CVE 41.4 billion or 25.8 percent of GDP in 2015 (from about 9 percent of GDP in 2014). - Customers’ arrears to ELECTRA CVE9.1 billion (5.5 percent of GDP). - For TACV and IFH authorities set aside CVE 2.5 billion (1.5 percent of GDP) in 2016 and CVE 1.1 billion annually through 2020; actual recapitalization payments for TACV Jan–early Sep 2016 amounted to CVE 1.3 billion. - Without urgent intervention, TACV capital needs could rise to around 3.0 percent of GDP in 2017. - Fiscal projections (Authorities' current MTFF and PIP, percent of GDP, 2015–2019): - Revenue: 26.2, 26.0, 26.0, 26.4, 26.5. - Tax revenue: 19.0, 19.0, 19.5, 19.9, 20.0. - Expenditure: 30.4, 30.9, 30.4, 29.9, 29.7. - Current spending: 25.7, 25.1, 24.8, 24.5, 23.8. - Net acquisition of nonfinancial assets: 4.6, 5.8, 5.6, 5.4, 5.9. - Overall balance: -4.1, -4.9, -4.3, -3.5, -3.3. - Total financing (incl. onlending): 8.3, 9.7, 8.2, 5.4, 4.0. - Real GDP growth (table): 1.5, 3.6, 4.1, 4.3, 4.3 (2015–2019). ### Monetary policy, liquidity, and financial-sector measures - BCV policy actions: - Policy rate cuts: reduced by 200 basis points to 3.75 percent by August 2014 and a further 25 basis points to 3.5 percent in February 2015 (cumulative noted as 225 basis points in one section). - Minimum reserve requirement ratio lowered from 18 percent to 15 percent. - Cut remuneration rate of excess reserves from 0.5 to 0.25 percent. - Monetary transmission and credit: - Lending rates slow to respond; private sector credit muted with limited growth: credit to the economy annual change series: -0.1 (2012), 1.5 (2013), -0.7 (2014), 1.8 (2015), 2.0 (2016, Prel.), 3.5 (2017, proj.), 4.1 (2018, proj.), 4.5 (2019, proj.), 5.6 (2020, proj.). - Broad money (M2) annual change: 6.3 (2012), 11.4 (2013), 7.4 (2014), 6.3 (2015), 5.8 (2016, Prel.), 6.0 (2017–2018 proj.), 6.1 (2019–2020 proj.). - Excess liquidity hovered around 5 percent of deposits; interbank market activity rare. - Financial stability measures: - New regulations to facilitate recognition of NPLs; BCV extended liquidation period for repossessed assets from 2 to 5 years (Feb 2015). - Finance ministry postponed tax collection to time of sale of repossessed assets. - BCV continued heightened supervision, reinforced supervision team, and stepped up on-site audits. - Recommendation to strengthen liquidity management, improve interbank market efficiency, and develop a secondary market for BCV and government bills. ### Outlook, projections, and risks - Growth forecasts: - Staff forecast growth to recover to 3.2 percent in 2016; staff medium-term trend growth about 4 percent; IMF Country Report 14/296 estimate potential growth at 3.5–4 percent. - Authorities’ 2016 growth forecast: 3.5–4.5 percent. - Staff medium-term growth projection: reach about 4 percent; staff scenario real GDP growth (Current DSA): 1.5 (2015), 3.2 (2016), 3.7 (2017), 4.1 (2018–2020). - Inflation and current account: - Average inflation projected about -1.6 percent in 2016; inflation expected to remain benign. - Current account deficit expected to widen in 2016 reflecting strong FDI inflows and related imports; Current account (including grants) projected: -7.2 (2016, Prel.), -8.8 (2017, proj.), -8.4 (2018, proj.), -7.9 (2019, proj.), -7.1 (2020, proj.) percent of GDP. - Reserves: - Gross international reserves projected to remain above 5 months of prospective imports; months of next year's imports series: 5.7 (2014), 5.5 (2015), 5.2 (2016, proj.), 5.7 (2017), 5.5 (2018), 5.2 (2019), 5.2 (2020). - Key risks: - External: dependence on Europe (tourism, FDI, remittances), Brexit exposure (~20 percent of tourists from UK), global financial market volatility affecting FDI. - Domestic: high public debt (125.8 percent of GDP in 2015), elevated NPLs, contingent SOE liabilities, weak credit creation. - Stress sensitivity: DSA notes vulnerability to a one-time nominal depreciation of 30 percent vis-a-vis the US$ (2017 referenced) and other downside scenarios. ### Debt sustainability, DSA results, and stress tests - Risk of debt distress: assessed as high under the staff baseline (PV of external debt to GDP 61.8 percent in 2015, exceeding 50 percent threshold). - External debt and projections: - External debt (selected): 49.6 (2005), 57.2 (2011), 78.3 (2013), 87.9 (2014), 96.9 (2015). - PV of PPG external debt expected to peak at 64.4 percent of GDP in 2017, then decline below 50 percent by 2023. - Total public debt: - Total public debt peaks about 130 percent (present value 96.1 percent of GDP in 2017) and declines gradually thereafter; PV of total public debt exceeds the 74 percent benchmark until 2028. - Total nominal debt series and public-sector projections given (e.g., public sector debt 102.5, 114.5, 125.8, 129.1, 130.2, 128.5, 124.7, 118.5, 113.4, 93.2, 62.3 across projection rows). - Stress-test findings: - Debt dynamics highly sensitive to growth shocks, depreciation shocks (one-time 30 percent nominal depreciation produces large increases in debt ratios), and realization of SOE contingent liabilities (SOE contingent liabilities 25 percent of GDP at end-2015 preliminary). - Remittances accounted for roughly 12 percent of GDP in 2015; vulnerability if depositors withdraw funds following banking stress. - Policy implication from DSA: continue fiscal consolidation, manage timing/scope of public investment, and strengthen monitoring of contingent SOE liabilities to reduce high debt risks. ### Structural reforms, financial development, and labor market - Financial sector characteristics and recommendations: - Little nonbank financial activity; high asset concentration; lending concentrated in top three banks (of 8); profitability low; interbank market thin; need to develop secondary market for BCV and government bills. - Policy options: demand-side (improve business environment, financial/business literacy) and supply-side (prudent supervision, NPL resolution, develop interbank market). - Structural reforms and labor market: - New labor code entered into force October 1, 2016; increases labor market flexibility and lowers cost of staff layoffs. - CI transformed to Cabo Verde Trade-Invest; one-stop online platform for foreign investors launched late 2014. - Credit guarantee scheme (CV Garante) operational in 2016; credit bureaus legislated in 2015—establishment should be accelerated. - Unemployment: average rate 15.8 percent (2014) to 12.4 percent (2015); youth unemployment 35.8 percent (2014) to 28.6 percent (2015). - Informality high: 59 percent of workforce reported working with no contract (INE, 2015). - Gender gap policy options: - Reduce unpaid work burden on women (expand care services, promote shared responsibility, targeted cash transfers, increased access to water and electricity). - Increase female employability/hiring (flexible work, entrepreneurship support, targeted training, access to financing, awareness campaigns). ### Policy recommendations and Executive Board / staff views - Fiscal: - Fiscal consolidation remains key to macroeconomic and debt sustainability; prioritize reducing externally financed capital spending while safeguarding critical social spending and strategic high-return investment projects. - Bolster domestic revenue mobilization; Fund TA recommended for revenue and tax administration reforms. - Revisit scope and timeline of externally financed PIP to put external debt on a downward path and lower debt distress risk. - Contain SOE fiscal risks: resolve financial difficulties of TACV and IFH swiftly; improve SOE efficiency and accelerate privatization where feasible. - Monetary and financial: - Maintain accommodative monetary policy while monitoring international reserves. - Strengthen liquidity management, improve interbank market efficiency, develop government securities market. - Continue heightened banking supervision, implement new banking regulations, expedite NPL resolution, and complete outstanding FSAP recommendations. - Structural: - Step up structural reforms to diversify growth and increase resilience: improve business climate (access to financing), labor market efficiency, human capital and vocational training, and prioritize reforms by expected returns and implementation capacity. - Board / staff assessments: - Executive Directors commended macroeconomic management, noted vulnerabilities to external shocks and high public debt (mainly concessional), and encouraged fiscal consolidation and structural reforms to promote private-sector-led growth and productivity gains. ### Data, statistics, and capacity - Data adequacy: broadly adequate for surveillance but shortages in financial and human resources; national accounts improvements with STA TA; quarterly production approach GDP published April 2015. - Key data vintages and frequencies (selected): GDP/GNP latest observation 6/30/16; external current account balance 6/30/16; stocks of central government debt 12/31/15. - Implementation status of 2009 FSAP recommendations: mix of Done, In process, Not initiated across governance, supervision, monetary operations, access to finance, legal/judicial, and crisis management items. *Source: IMF staff report for Cabo Verde: 2016 Article IV Consultation (November 3, 2016).* ### 2014. Tourism recovered and remittances remained robust, but FDI and public investment ### 2014. Tourism recovered and remittances remained robust, but FDI and public investment slowed. ### Recent developments and macroeconomic performance - Real GDP growth stalled: 1.9 percent in 2014 and 1.5 percent in 2015. - Unemployment and labor market: - Unemployment rate declined to 12.4 percent. - Youth unemployment declined but remained high at 28.6 percent. - Inflation: - Consumer price inflation averaged 0.1 percent for 2015. - Inflation remained muted owing to lower food and energy prices. - External sector and reserves: - The current account deficit shrank markedly to an estimated 4.25 percent of GDP, reflecting lower imports, the recovery in tourism, and continued strong remittances. - International reserves increased to about 5.75 months of prospective imports. - Separate reporting notes reserve coverage of 5.8 months of prospective imports for 2015. - Tourism, remittances, and FDI: - Tourism recovered in 2014 and continued strong growth into the first half of 2016. - Remittances remained robust. - FDI slowed in 2014 but accelerated in the first half of 2016, reflecting a large increase in the pipeline of projects. - Banking sector and non-performing loans: - Non-performing loans (NPLs) peaked at 22.4 percent in August 2014 and declined to 16.9 percent in June 2016. - Asset quality and bank profitability remain a concern, though capital buffers appear adequate. ### Fiscal position and public debt - Fiscal consolidation and outcomes: - The fiscal deficit fell to 4.1 percent of GDP in 2015, about 3.4 percentage points less than the year before, on account of a strong revenue performance. - Total financing needs (including onlending to state-owned enterprises) declined by 2.3 percentage points to 8.3 percent of GDP as the investment program was lowered to slow the buildup of public debt. - Public debt stock: - Total public debt reached an estimated 125.8 percent of GDP by end-2015, reflecting the scaling up of externally financed public investment since 2008 coupled with low growth, falling prices and the recent strong appreciation of the U.S. dollar. - Debt service and external debt: - External debt service and concessionality kept debt service manageable despite high debt levels. - Selected government finance indicators (high-level): - Revenue rose to 26.2 percent of GDP in 2015. - Tax and nontax revenue was 23.8 percent of GDP in 2015. - Grants were 2.4 percent of GDP in 2015. - Expenditure was 30.4 percent of GDP in 2015. - Overall balance (incl. grants) was -4.1 percent of GDP in 2015. ### Monetary policy and financial sector measures - Monetary easing: - Banco de Cabo Verde (BCV) reduced its policy rate by 25 basis points to 3.5 percent in February 2015. - The minimum reserve requirement ratio was lowered from 18 to 15 percent. - Credit and liquidity: - Lending rates were slow to respond because of the corporate debt overhang and banks’ risk aversion. - Credit to the economy showed limited growth; concerns remain about the transmission mechanism of monetary policy. - Financial stability actions and recommendations: - Authorities adopted new regulations to facilitate recognition of NPLs and heightened bank supervision. - Staff encouraged strengthening liquidity management capacity, improving interbank market efficiency, and continuing development of the government securities market. - Progress was noted in following up on recommendations of the 2009 Financial Sector Assessment Program, with encouragement to implement remaining recommendations. ### Outlook and risks - Growth forecast and drivers: - Growth is forecast to recover to 3.2 percent in 2016, supported by FDI, domestic demand, agriculture, and tourism. - Tourism was expected to benefit from the mild upswing in Europe. - Inflation and current account: - Inflation was expected to remain benign. - The current account deficit was expected to widen in 2016 reflecting strong FDI inflows and related imports, while the large-scale public investment program is gradually phased out over the medium term. - Vulnerabilities: - The economy remains vulnerable to external shocks, notably from Europe, the main source of tourism revenue, FDI and remittances. - High public debt (125.8 percent of GDP in 2015) poses elevated debt risks despite comfortable debt service indicators. ### Executive Board views and key policy recommendations - Executive Directors’ assessment: - Commended macroeconomic management given difficult external conditions and welcomed signs of recovery with prospects for a marked acceleration of growth in 2016. - Noted vulnerability to external shocks and high public debt (mainly concessional). - Encouraged fiscal consolidation, structural reforms to promote private-sector-led growth, and measures to bolster productivity for long-term growth. - Key policy recommendations and priorities: - Fiscal consolidation remains key to macroeconomic and debt sustainability; address financial difficulties in state-owned enterprises (SOEs) and improve investment efficiency. - Revisit the scope and timeline of externally financed public investment to put external debt on a downward path and lower the risk of debt distress in the medium term. - Safeguard critical social spending and prioritize strategic public investment projects while enhancing their efficiency. - Bolster domestic revenue mobilization, with Fund technical assistance support for reforms. - Improve efficiency of SOEs and accelerate privatization to bolster private sector growth; resolve financial difficulties of two SOEs swiftly. - Maintain an accommodative monetary policy stance while carefully monitoring international reserves for signs of pressure. - Strengthen liquidity management, improve interbank market efficiency, and continue developing the government securities market. - Continue heightened banking supervision and implement measures to address NPLs; complete outstanding FSAP recommendations. - Step up structural reforms to enhance resilience to external shocks and diversify growth sources—improve business climate, increase labor market efficiency, and support education and vocational training to reduce skill mismatches. - Prioritize structural reforms based on expected returns and reform implementation capacity. *Source: IMF staff report for Cabo Verde: 2016 Article IV Consultation (November 3, 2016).* ### 9. The recovery showed signs of taking off in the first six months of 2016. Real GDP grew ### 9. The recovery showed signs of taking off in the first six months of 2016. Real GDP grew ### Recovery in H1 2016 - Real GDP grew by 5.9 and 3.6 percent respectively in the first and second quarter on account of tourism, agriculture, and public services. - Tourist arrivals grew by 16 percent. - Domestic demand showed signs of recovery as remittances remained strong and private sector credit inched up, reflecting the gradual reduction of corporate non-performing loans (NPLs). ### Policy implementation and structural measures - Policy implementation was broadly in line with Fund staff advice. - Authorities agreed external debt should be curbed by reducing public investment while being mindful of growth. - Staff encouraged continuation of the structural reform program but advised a slightly more gradual approach, especially in the fiscal area due to capacity constraints. - Central Bank of Cabo Verde (BCV) actions: - Reduced the minimum reserve requirement from 18 to 15 percent. - Embarked on an accommodative monetary policy stance; policy rate reduced by 225 basis points (noted elsewhere as cumulative reductions: 200 basis points to 3.75 percent by August 2014, then 25 basis points to 3.5 percent in February 2015). - Labor market reform: - A new labor code increasing labor market flexibility and lowering the cost of staff layoffs was submitted to parliament in late 2015 and entered into force in October 2016. ### Medium-term outlook and growth projections - 2016 forecast: growth is forecast to recover to 3.2 percent supported by FDI, domestic demand, agriculture, and tourism. - Tourism-related FDI pipeline: - Signed projects worth €625 million (42 percent of 2016 GDP) expected over the medium term. - Further projects worth some €700 million are under discussion. - Average inflation is projected to remain negative at about -1.6 percent in 2016. - Staff view of medium-term trend growth: about 4 percent seems achievable. - IMF Country Report 14/296 estimate: potential growth at 3.5–4 percent. - Gross international reserves are forecast to remain above 5 months of prospective imports, supported by tourism, FDI and remittances. ### Risks to the outlook - External risks: - High dependence on tourism and remittances makes Cabo Verde vulnerable to adverse developments in Europe, including risks related to Brexit—about 20 percent of the country’s tourists come from the UK. - Global financial market volatility and sovereign stress could impede FDI and be transmitted via banking sector linkages to Portugal. - Domestic risks: - Public debt has risen to uncomfortably high levels. - Elevated level of NPLs indicates financial sector risks. - Continued weakness in credit creation could depress consumption and investment. - Longer-term constraint: growth depends critically on increasing productivity and strengthening the private sector through reforms in access to financing, labor market efficiency, and human capital development. ### Debt sustainability - Risk of debt distress is high, though baseline debt service indicators remain at comfortable levels. - Total nominal debt reached 125.8 percent of GDP (mainly reflecting recent dollar appreciation and lower GDP growth and inflation). - PV of external debt to GDP reached 61.8 percent in 2015, exceeding the 50 percent threshold, and is projected to gradually decline to below 50 percent in the medium term. - Debt sustainability remains highly sensitive to a depreciation shock (a one-time nominal depreciation of 30 percent vis-a-vis the US$ in 2017 is referenced in the DSA). ### External stability assessment - External position in 2015 was broadly consistent with medium-term fundamentals and desirable policy settings; short-term risks appear low. - Exchange rate is broadly in line with fundamentals; no significant misalignments of Cabo Verde’s real exchange rate identified by two EBA-lite based assessment models. - Current account deficits reflect FDI and, more recently, government borrowing. - International investment position reached minus $235 million in 2015 but is not considered a threat to external stability because it reflects continued net FDI inflows. - International reserves projected to be broadly adequate at over 5 months of prospective imports over the medium term. - Improving the business environment—particularly access to financing, labor market efficiency, and human and physical capital productivity—is important to diversify production and increase resilience to external shocks. ### Fiscal policy: adjustments, challenges, and scenarios - 2015 outcomes: - Tax revenue increased strongly by about 12 percent in 2015 (includes one-off effects). - Fiscal deficit decreased to 4.1 percent of GDP, about 3.4 percent of GDP lower than in 2014. - Overall financing needs including onlending to SOEs declined from 10.6 percent of GDP in 2014 to 8.3 percent of GDP in 2015. - Revenue and expenditure projections (Authorities' current MTFF and PIP / Authorities' mid-2016 MTFF and PIP table highlights): - Revenue: 26.2, 26.0, 26.0, 26.4, 26.5 percent of GDP for 2015–2019 (Authorities' current MTFF and PIP). - Tax revenue: 19.0, 19.0, 19.5, 19.9, 20.0 percent of GDP for 2015–2019. - Expenditure: 30.4, 30.9, 30.4, 29.9, 29.7 percent of GDP for 2015–2019. - Current spending: 25.7, 25.1, 24.8, 24.5, 23.8 percent of GDP for 2015–2019. - Net acquisition of nonfinancial assets: 4.6, 5.8, 5.6, 5.4, 5.9 percent of GDP for 2015–2019. - Overall balance: -4.1, -4.9, -4.3, -3.5, -3.3 percent of GDP for 2015–2019. - Total financing (incl. onlending): 8.3, 9.7, 8.2, 5.4, 4.0 percent of GDP for 2015–2019. - Real GDP growth in the table: 1.5, 3.6, 4.1, 4.3, 4.3 percent for 2015–2019 (Authorities' current MTFF and PIP); alternative series shown for other scenarios. - Fiscal strategy recommendations: - Contain public debt and secure debt sustainability without stifling the recovery by focusing consolidation on reducing externally financed capital spending (lower multiplier of about 0.15) while rationalizing current expenditure. - Strengthen domestic revenue mobilization as concessional financing phases out. - Continue selection and management of public investment to maximize returns; strengthen project evaluation and the National Investment System. - Budget execution flexibility: - Current spending as approved by parliament represents a maximum and can be cut by up to 30 percent if revenue underperforms. - SOE fiscal risks and contingent liabilities: - For two loss-making SOEs (TACV and IFH), authorities set aside CVE 2.5 billion (1.5 percent of GDP) in 2016 and CVE 1.1 billion annually through 2020. - Without urgent intervention, capital needs for TACV alone could rise to around 3.0 percent of GDP in 2017. - Aggregate result of all SOEs amounted to a loss of CVE 1.1 billion (0.7 percent of GDP) in preliminary 2015 data, primarily on account of TACV. - Contingent liabilities increased to CVE 41.4 billion or 25.8 percent of GDP in 2015, from about 9 percent of GDP in 2014, primarily due to IFH and ELECTRA loans. - Customers have accumulated arrears to ELECTRA amounting to CVE9.1 billion (5.5 percent of GDP); authorities urged to step up collection efforts. - Actual recapitalization payments for TACV from January to early September 2016 amounted to CVE 1.3 billion. ### Authorities’ views - Authorities are more optimistic for growth than staff: their growth forecast for 2016 is 3.5–4.5 percent, with further acceleration in following years. - Authorities noted high debt-to–GDP ratio is almost exclusively concessional and debt service indicators continue to be comfortable. - Authorities are fully committed to fiscal consolidation and to crowding in the private sector by accelerating privatization. - Authorities cautioned that further reducing the externally financed PIP would be very costly because all loans in the PIP pipeline had been contracted by the previous government. ### Monetary policy: stance and transmission - BCV actions and stance: - Policy rate cuts: cut by 200 basis points to 3.75 percent by August 2014; further reduced by 25 basis points to 3.5 percent in February 2015. - Lowered minimum reserve requirement ratio (MRR) from 18 percent to 15 percent. - Cut remuneration rate of excess reserves from 0.5 to 0.25 percent. - Objectives: bolster private credit while protecting the peg and facilitating resolution of NPLs. - Transmission and credit developments: - Lending rates did not respond much due to corporate debt overhang and banks’ risk aversion. - Private sector credit started to grow again but remained muted in 2015, with much of the 2.8 percent increase on account of SOEs. - BCV absorbed excess liquidity to stabilize transmission and encourage the interbank market; excess liquidity hovered around 5 percent of deposits and interbank market activity remained rare. - BCV noted the cost of absorbing the full amount of excess liquidity would be prohibitive. *Source: IMF staff report as provided in the content unit.* ### 32. Credit growth is expected to accelerate. Confidence indicators suggest a gradual ### 32. Credit growth is expected to accelerate. Confidence indicators suggest a gradual ### Credit outlook and drivers - Credit growth is expected to accelerate in 2016. - Confidence indicators suggest a gradual improvement in the business climate and anecdotal evidence suggests that banks are cautiously optimistic. - Factors expected to help credit extension pick up in 2016: - Strong capital buffers. - NPL-resolution measures. - Low government yields. - Improved prospects of a sustained economic recovery. ### Financial sector — challenges and opportunities (Box 1 summary) - Financial benchmarking shows performance broadly in line with estimated benchmarks, but several issues warrant attention: - Little financial sector activity outside of banking. - High asset concentration. - Lending activity firmly concentrated in the top three banks (out of 8). - Access to the banking sector—measured by the number of branches per 100,000 adults—is high relative to expectations. - Profitability is rather low, with returns from assets and equity significantly below the expected median. - High asset concentration plus low profitability could suggest the banking sector is overcrowded. - Disequilibrium model (Maddala and Nelson, 1974) estimates: - Demand factors were the main drivers of Cabo Verde’s credit market in the late 2000s. - Supply factors’ role has increased in recent years. - Policy implications to promote private-sector led growth: - Demand-side policies: - Increase productivity by improving the business environment for the private sector. - Provide financial and business literacy training to small businesses. - Supply-side policies: - (i) Strengthen the financial sector through continued prudent banking supervision. - (ii) Reduce credit risks by resolving the non-performing loan (NPL) overhang. - (iii) Facilitate the reallocation of liquidity across banks by developing the interbank market. ### Authorities’ views - Authorities broadly agreed with staff’s views on the monetary sector. - They noted credit growth in 2016 has shown signs of recovery. - They agreed that the monetary policy stance needs to remain accommodating provided that international reserves remain strong. ### Financial supervision and banking sector metrics - Asset quality and bank profitability remain a concern, but capital buffers appear adequate (Table 5 referenced). - Profitability is depressed by low credit extension and high NPLs. - Short-term commercial bank spreads dropped sharply in early 2016, but longer-term spreads increased, maintaining the average spread at 7.3 percent. - NPLs trajectory: - Peaked at 22.3 percent in August 2014. - Declined to 16.5 percent at end-2015. - Inched up to 16.9 percent in June 2016. - Capital adequacy: - Slightly declined to 14.8 percent in June 2016. - Provisions to NPLs remain quite strong at about 53 percent. - Regulatory and supervisory measures to facilitate NPL resolution: - February 2015: BCV extended the time period to liquidate repossessed assets from NPLs from 2 to 5 years. - Finance ministry postponed tax collection to the time of sale of repossessed assets. - BCV continued heightened supervision and is reinforcing its supervision team and stepping up on-site audits. - BCV encourages banks and corporates to recognize and address NPLs. - Financial market development gaps: - Cabo Verde lags in financial market development despite improvements in the WEF index. - Interbank money market only recently resumed activity after a hiatus of a couple of years. - A secondary market for BCV and government bills still needs to be established and activated. - Establishing such a market would help prepare alternative financing options beyond concessional borrowing in the medium to longer term. ### Structural reforms and labor market - Business climate improvements remain crucial for job creation and private sector growth. - Cabo Verde moved from 122nd place in 2013/14 to 110th place in 2016/17 in the World Economic Forum global competitiveness rankings. - New labor code increasing labor market flexibility and lowering the cost of staff layoffs came into effect on October 1, 2016. - Cabo Verde Investimentos (CI) launched an online one-stop-platform for foreign investors in late 2014. - CI was transformed into Cabo Verde Trade-Invest earlier in 2016 to enhance synergies between FDI and export promotion. - September 2016: authorities entered into a collaboration agreement to establish an African Growth and Opportunity Act (AGOA) Trade Resource Center to promote exports. - Earlier in 2016, a credit guarantee scheme (CV Garante) to facilitate financing for small and micro businesses became operational. - 2015: government provided for the establishment of credit bureaus to improve credit information—establishment should be accelerated. - Analytical work indicates lack of know-how in accessing financing is a major factor holding back credit extension—relevant training should be expanded. - Unemployment and gender/labor issues: - Average unemployment rate declined from 15.8 percent (2014) to 12.4 percent (2015). - Youth unemployment decreased from 35.8 percent in 2014 to 28.6 percent in 2015. - Unemployment is overall higher among men than women, but highest rates observed among young women ages 15–19 and 20–24 in rural areas. - Informality is high: 59 percent of the workforce reported working with no contract (INE, 2015). - Women more likely to be in informal/unpaid work: 90% of women report unpaid work versus 73% of men. - Women spend on average about 3.5 hours more than men on unpaid work each day. - Marone (2016) estimates that closing the gender gap in labor force participation would increase the total labor force participation rate by 12.2 percent (26,428 workers) and could have a direct impact on the level of GDP between 7.4 to 12.2 percent; the actual impact depends on absorption capacity and labor productivity of new entrants. - Policy options to close the gender gap: - Reduce time spent by women on unpaid work: expand capacity and affordability of care services; promote shared responsibility in care; more targeted cash transfer policies; increased access to water and electricity. - Increase employability and hiring of women: promote flexible work arrangements; female entrepreneurship; specific training integrated with economic diversification initiatives; access to financing; awareness campaigns to increase gender diversity in business. ### Privatization and public investment - Privatization program accelerated since 2014: - 2014: ministry of finance established a unit to encourage and plan PPPs and privatization and to oversee SOE privatization. - Privatization of minority holdings accelerated starting in 2014. - A modernized privatization law and a new Public-Private Partnership (PPP) law came into effect late in 2015. - Authorities are reassessing the privatization program to align with the new government’s priorities. - Public Investment Program (PIP): - Authorities decided to gradually phase out the PIP given high public debt and several major investment projects at or near completion. - Private investment needs to take over as the main growth engine. ### Staff appraisal, risks, and recommendations - Growth and risks: - Staff forecast an acceleration of the recovery, expecting growth to continue to pick up speed and reach about 4 percent in the medium term, powered by tourism and trade, and supported by FDI, remittances and private sector credit growth. - Accelerated progress on structural reforms could help growth reach an even higher trajectory. - Vulnerabilities: - Remittances and tourism growth could be thwarted by the implications of Brexit on both the UK and the euro area. - Credit to the private sector could be held back by a slow resolution of NPLs. - Fiscal and institutional recommendations: - Staff welcomes authorities’ commitment to fiscal consolidation to address debt risks. - Revised PIP foresees gradual phasing out as decided by the authorities; these measures should help Cabo Verde regain a moderate risk of debt distress over the medium term. - Staff initially advised an even deeper and more frontloaded consolidation but recognizes limits given ongoing investment projects. - Authorities’ medium-term fiscal consolidation path is described as necessary and realistic; budget execution is flexible. - Authorities should be ready to implement in-year expenditure containment if revenue falls short. - Priority on bringing tax revenue reforms to fruition, including strengthening human resource and IT capacity. - Specific recommendations for troubled entities: - Urgent action and careful monitoring required for TACV and IFH. - Staff welcomes authorities’ determination to swiftly tackle problems at TACV and reduce and then eliminate recapitalizations, in cooperation with the World Bank. - For IFH, government intends to appoint a commission to review and salvage the project with World Bank assistance. - Monetary policy and banking sector recommendations: - Staff commends BCV for easing monetary conditions and measures to facilitate NPL resolution. - Continued benign inflation and strong international reserves should allow monetary policy to remain accommodative for the foreseeable future, while monitoring euro interest rates, domestic liquidity conditions and international reserves. - In the medium term, strengthening the monetary transmission mechanism (with MCM support) is a key objective. - Important to expedite resolution of NPLs to strengthen the banking sector and facilitate private sector credit growth. - BCV should continue heightened supervision (including provisioning for NPLs), implement regulations of the new banking laws, and with the finance ministry make the Financial Stability Committee fully operational to enhance crisis preparedness. - Macroeconomic stance: - The macroeconomic policy mix is broadly appropriate. - Fiscal consolidation expected to continue in 2016 and the medium term, supported by higher tax revenue and careful rationing of current and capital spending. - Fixed exchange rate regime has anchored macroeconomic stability; external stability does not appear to be at risk. - Rapid development of tourism increased dependence on the sector; Cabo Verde remains vulnerable to exogenous shocks, particularly from Europe. - Reinforces importance of structural reforms to support economic diversification and enhance competitiveness to set growth on a broader footing. - Careful macroeconomic management remains crucial to safeguard the peg and macroeconomic stability. *Source: IMF staff report excerpt provided in the content unit.* ### 47. Staff recommends that the next Article IV consultation take place on the standard ### _cr16366 - 47. Staff recommends that the next Article IV consultation take place on the standard ### Recent economic developments - Real GDP growth: 1.1 (2012), 0.8 (2013), 1.9 (2014), 1.5 (2015), 3.2 (2016, Prel.), 3.7 (2017, proj.), 4.1 (2018, proj.), 4.1 (2019, proj.), 4.1 (2020, proj.). - GDP deflator: 0.6 (2012), 1.4 (2013), -0.1 (2014), 0.5 (2015), 0.1 (2016, Prel.), 1.2 (2017, proj.), 1.8 (2018, proj.), 2.0 (2019, proj.), 2.0 (2020, proj.). - Consumer price index (annual average): 2.5 (2012), 1.5 (2013), -0.2 (2014), 0.1 (2015), -1.6 (2016, Prel.), 0.8 (2017, proj.), 1.6 (2018, proj.), 2.0 (2019, proj.), 2.0 (2020, proj.). - Headline and core inflation have declined sharply due to lower food and energy prices. - Tourism receipts and hotel guests modestly improved (time series shown for 2008–2015, with 2016 projections). - Gross international reserves (months of next year's imports) evolution: 4.1 (2009), 4.5 (2010), 5.9 (2011), 5.8 (2012), 5.8 (2013), 5.7 (2014), 5.5 (2015), 5.2 (2016, proj.). ### Monetary developments and credit growth - Money growth drivers (12 months growth): Net foreign assets 4.6, 6.6, 6.7, 3.9, 2.2, 1.4, 0.7, 0.5, -0.2 (2012–2020 series shown in table). - Broad money (M2) annual change: 6.3 (2012), 11.4 (2013), 7.4 (2014), 6.3 (2015), 5.8 (2016, Prel.), 6.0 (2017, proj.), 6.0 (2018, proj.), 6.1 (2019, proj.), 6.1 (2020, proj.). - Credit to the economy (annual change): -0.1 (2012), 1.5 (2013), -0.7 (2014), 1.8 (2015), 2.0 (2016, Prel.), 3.5 (2017, proj.), 4.1 (2018, proj.), 4.5 (2019, proj.), 5.6 (2020, proj.). - Excess reserves to total deposits rose while credit growth stagnated despite rising excess reserves. - Nonperforming loans: 8.4 (2010), 11.8 (2011), 14.0 (2012), 14.1 (2013), 16.4 (2014), 18.7 (2015), 16.5 (2016, Jun-16). - Provisions to nonperforming loans: 73.1 (2010), 57.0 (2011), 53.7 (2012), 51.6 (2013), 48.8 (2014), 54.4 (2015), 53.1 (2016, Jun-16). - The gap between lending and deposit rates remains large (chart series: Bank Lending Rate, 6m T-bill rate, BCV Policy Rate, Bank Deposit Rate). ### Performance compared to small middle-income peers - Government balance excluding grants: Cabo Verde shows a much higher fiscal deficit relative to small MICs (time series 2009–2015). - International reserves (months of next year's imports): Cabo Verde maintained stronger reserves coverage than small MICs (2009–2015). - Public debt: Cabo Verde's public debt is more than two times the small MICs average (percent of GDP series 2009–2015). - External current account (including grants) narrowed but remains a deficit compared to peers. - Real GDP growth: Cabo Verde grew more slowly than the average for small MICs in recent years. - Headline inflation: Cabo Verde's inflation has been below the small MICs average. ### Selected economic indicators and projections (Table 1 highlights) - Exports of goods and services (annual percent change): 8.4 (2012), 6.9 (2013), 2.7 (2014), -9.8 (2015), 4.8 (2016, Prel.), 7.5 (2017, proj.), 7.5 (2018, proj.), 7.5 (2019, proj.), 7.5 (2020, proj.). - Imports of goods and services (annual percent change): -6.2 (2012), -5.7 (2013), 6.3 (2014), -8.6 (2015), 9.7 (2016, Prel.), 6.8 (2017, proj.), 6.8 (2018, proj.), 6.8 (2019, proj.), 6.8 (2020, proj.). - External current account (including official transfers, percent of GDP): -12.6 (2012), -4.9 (2013), -9.0 (2014), -4.3 (2015), -7.2 (2016, Prel.), -8.8 (2017, proj.), -8.4 (2018, proj.), -7.9 (2019, proj.), -7.1 (2020, proj.). - Total nominal government debt (percent of GDP): 91.1 (2012), 102.5 (2013), 114.5 (2014), 125.8 (2015), 129.1 (2016, Prel.), 130.2 (2017, proj.), 128.5 (2018, proj.), 124.7 (2019, proj.), 118.6 (2020, proj.). ### Balance of payments (Table 2 highlights, millions of Euros) - Current account (Est.): -172 (2012), -68 (2013), -127 (2014), -62 (2015), -108 (2016), -138 (2017, proj.), -140 (2018, proj.), -139 (2019, proj.), -134 (2020, proj.). - Trade balance (Est.): -500 (2012), -468 (2013), -455 (2014), -434 (2015), -501 (2016), -534 (2017, proj.), -567 (2018, proj.), -602 (2019, proj.), -638 (2020, proj.). - Gross international reserves (end of period, € millions): 299 (2012), 347 (2013), 420 (2014), 453 (2015), 484 (2016), 506 (2017, proj.), 517 (2018, proj.), 526 (2019, proj.), 522 (2020, proj.). - Months of next year's imports of goods and services: 4.1 (2012), 4.5 (2013), 5.9 (2014), 5.8 (2015), 5.8 (2016), 5.7 (2017), 5.5 (2018), 5.2 (2019), 5.2 (2020). ### Government operations and fiscal projections (Tables 3a–3b highlights) - Revenue (millions of Cabo Verde Escudos): 36,688 (2014), 37,646 (2015), 35,327 (2016, Est.), 41,827 (2017, proj.), 45,108 (2018, proj.), 44,947 (2019, proj.), 47,725 (2020, proj.), 50,767 (2021, proj.), 53,794 (2022, proj.) — note: table shows 2014–2020 series. - Expenditure (millions CVEsc): 52,151 (2014), 51,332 (2015), 47,083 (2016, Est.), 48,415 (2017, proj.), 50,492 (2018, proj.), 50,044 (2019, proj.), 51,127 (2020, proj.), 54,619 (2021, proj.), 53,785 (2022, proj.). - Overall balance (incl. grants, percent of GDP): -10.3 (2014), -8.9 (2015), -7.5 (2016, Est.), -4.1 (2017, proj.), -3.3 (2018, proj.), -3.0 (2019, proj.), -1.9 (2020, proj.), -2.0 (2021, proj.), 0.0 (2022, proj.). - Primary balance (percent of GDP): -8.4 (2014), -6.7 (2015), -5.3 (2016, Est.), -1.5 (2017, proj.), -0.7 (2018, proj.), -0.2 (2019, proj.), 0.8 (2020, proj.), 0.7 (2021, proj.), 2.6 (2022, proj.). - Net external financing (percent of GDP): 11.8 (2014), 12.8 (2015), 10.0 (2016, Est.), 6.7 (2017, proj.), 4.9 (2018, proj.), 5.1 (2019, proj.), 3.6 (2020, proj.), 2.1 (2021, proj.), -0.3 (2022, proj.). ### Monetary survey (Table 4 highlights) - Net foreign assets (millions CVEsc): 25,375 (2012), 33,541 (2013), 42,698 (2014), 48,463 (2015), 51,927 (2016, Est.), 54,304 (2017, proj.), 55,573 (2018, proj.), 56,576 (2019, proj.), 56,134 (2020, proj.). - Broad money (M2, millions CVEsc): 123,407 (2012), 137,491 (2013), 147,668 (2014), 156,929 (2015), 166,048 (2016, Est.), 176,070 (2017, proj.), 186,661 (2018, proj.), 198,065 (2019, proj.), 210,116 (2020, proj.). - Credit to the economy (levels and percent change series presented; percent changes noted above). ### Financial soundness of the banking sector (Table 5 highlights) - Regulatory capital to risk-weighted assets: 15.3 (2010), 13.9 (2011), 14.2 (2012), 15.1 (2013), 15.6 (2014), 16.1 (2015), 14.8 (Jun-16). - Nonperforming loans to total loans: 8.4 (2010), 11.8 (2011), 14.0 (2012), 14.1 (2013), 16.4 (2014), 18.7 (2015), 16.5 (Jun-16). - Return on assets: 0.7 (2010), 0.4 (2011), 0.2 (2012), 0.3 (2013), 0.2 (2014), 0.4 (2015), 0.1 (Jun-16). - Liquid assets to total assets: 8.1 (2010), 7.1 (2011), 15.0 (2012), 22.1 (2013), 19.9 (2014), 21.9 (2015), 23.4 (Jun-16). - Spreads: Spread (90 day lending - time deposit rate) series: 7.5 (2010), 5.2 (2011), 7.9 (2012), 7.1 (2013), 7.1 (2014), 8.3 (2015), 3.9 (Jun-16). ### Implementation status of 2009 FSAP recommendations and financial sector reforms - Recommendations span governance, supervision, monetary operations, access to finance, pension and insurance reform, legal/judicial improvements, crisis management, and banking supervision. - Status entries include: Done; In process; Not initiated; and specific items updated by IMF staff in October 2016. - Selected actions and implementation notes: - Strengthen governance and transparency of the INPS — Short term: Done. - Evaluate additional parametric reforms to the INPS to ensure long-term viability — Medium term: Done. - Evaluate costs/benefits/risks of allowing INPS to place part of its assets abroad — Short term: In process. - Modernize legal/regulatory framework for insurance — Medium term: Not initiated. - Implement further steps to promote mediation; Finish replacing the Code of Civil Procedure — Short term: In process. - Improve supervision of onshore and offshore banks; strengthen supervisory powers and adopt stricter licensing standards — Short/medium term: In process or Done as indicated. - Use t-bills and repos for monetary operations; strengthen coordination of monetary and fiscal operations between BCV and the Treasury; harmonize tax treatment of BCV securities and treasuries — recommendations listed (various timeframes/status). ### Millennium Development Goals indicators (Table 7 highlights) - Employment to population ratio, 15+, total (%): 57 (1990), 58 (1995), 59 (2000), 60 (2005), 62 (2010), 63 (2011), 63 (2012), 63 (2013). - Literacy rate, youth female (% ages 15–24): 86 (1990); youth male: 90 (1990). - Primary completion rate, total (%): 57 (1990), 74 (1995), 100 (2000), 86 (2005), 100 (2010), 97 (2011), 99 (2012), 95 (2013). - GNI per capita, Atlas method (current US$): 870 (1990), 1,290 (1995), 1,330 (2000), 2,090 (2005), 3,430 (2010), 3,570 (2011), 3,470 (2012), 3,530 (2013), 1,674 (latest irregular entry in table). - Net ODA received per capita (current US$): 302 (1990), 293 (1995), 214 (2000), 339 (2005), 672 (2010), 514 (2011), 498 (2012), 488 (2013), 50 (later entry). ### Risk Assessment Matrix — sources of risk, likelihood, impact, and policy responses - Tighter or more volatile global financial conditions - Likelihood: Medium - Impact if realized: Medium — could hamper FDI-dependent tourism real estate sector and delay recovery. - Policy response: Strengthen focus on accelerating private sector balance sheet rebuilding to jump-start domestic investment. - Economic fallout from political fragmentation (e.g., Brexit) - Likelihood: Medium - Impact if realized: Medium — could reduce tourists from UK/EU, hurting tourism and services. - Policy response: Diversify the tourism base by attracting tourists from countries outside the EU. - Weaker-than-expected global growth - Likelihood: High - Impact if realized: Medium/High — could depress exports, remittances, FDI, and reduce grants/donor financing; significant impact on growth and reserves. - Policy response: Improve fiscal space to bolster domestic demand through current government spending when it is needed. - Delays in fiscal consolidation relative to staff advice - Likelihood: Medium - Impact if realized: Medium — could undermine investor perceptions, reduce capital inflows, weaken confidence in the peg, and reduce concessional support. - Policy response: Consider reducing current spending and postponing or canceling select infrastructure projects. - Financial instability (rising NPLs) - Likelihood: Medium - Impact if realized: Medium — banking system fairly well capitalized but little fiscal space for bail-outs. - Policy response: Work with banks to accelerate NPL resolution and increase fiscal space to widen policy options. - Delays in state-owned enterprise (SOE) reforms - Likelihood: Medium - Impact if realized: Medium/High — SOE debt amounted to 38 percent of GDP as of end-2015; persistent weak SOE performance could crowd out public investment and threaten fiscal sustainability. - Policy response: Proceed with structural reforms following the example of Electra, and consider privatization when possible. - Failure to increase productivity (structural reform delays) - Likelihood: Medium - Impact if realized: Medium — hinders external competitiveness, potential GDP growth and employment. - Policy response: To crowd-in the private sector, accelerate structural reforms, improve the banking sector’s intermediation ability, and improve access to financing. *Source: IMF staff report and statistical tables contained in _cr16366 (IMF), March 2016; updated data and implementation status as presented in the source document.* ### Appendix I. External Stability Assessment ### Appendix I. External Stability Assessment ### External Sector Developments - Cabo Verde’s balance of payments has been characterised by a current account deficit (about 10 percent over the period 2003–15) fuelled primarily by FDI and government borrowing. - FDI was the main driver of imports until 2008; since then FDI and grants have declined owing to the euro crisis, and the current account deficit has been increasingly driven by government borrowing to finance investment, leading to a rise in external public debt. - Cabo Verde’s net international investment position reached minus $235 million in 2015. - The current account deficit fell in 2015 to 4.3 percent of GDP (from 9 percent of GDP in 2014), driven in part by a fall in imports and a strong increase in emigrant remittances. - Staff forecasts the current account deficit to widen to about 8 percent of GDP in 2017 owing to strong FDI and recovering growth, and then to gradually improve to around 7 percent of GDP as goods exports continue to grow and the tourism sector recovers. - International reserve coverage is over 5 months of prospective imports. - The optimal reserve level was previously estimated in the interval of 3.7–5 months of prospective imports. - An updated assessment using the Fund’s LIC/MIC framework estimates optimal reserves at about 4 months of imports. - A higher level could be preferable given vulnerabilities from the country’s size and lack of export diversification. ### Model-Based Assessment - The real effective exchange rate (REER) has been relatively stable over the past decade; in 2015 the REER remained in line with the average over the past five years, though moderate cumulative appreciation over the last decade may signal some erosion in external competitiveness. - Two complementary assessment models based on the extended External Balance Assessment (EBA-lite) methodology produce differing REER misalignment signals but both are below the 10-percent threshold for statistical significance: - The CA model estimates a CA norm of -7.4 percent of GDP for 2015 against the actual CA balance of -4.3 percent of GDP, implying Cabo Verde’s REER may be undervalued by 8 percent. Out of the CA gap of 3.1 percent of GDP, only 0.2 percent of GDP is estimated to be due to policy. - The REER index model suggests Cabo Verde’s REER for 2015 may be overvalued by about 4 percent, out of which about -2½ percent is estimated to be related to policy. ### Broader Competitiveness Indicators - Cabo Verde’s competitiveness has improved but still lags behind the middle-income country average. - According to the World Economic Forum (WEF), Cabo Verde ranks 110th out of 138 countries in 2016–17 on global competitiveness. - Key areas with considerable room for improvement: labour market efficiency, financial market development, business sophistication, and innovation. - The most problematic factors for doing business in Cabo Verde (2016) were identified as: access to financing, government bureaucracy, tax rates and complexity of the tax system, and restrictive labor regulations. - Structural reforms to improve the business climate remain critical for enhancing competitiveness and attracting private investment. ### Debt Sustainability: Background and Recent Developments - Based on the Staff baseline scenario, Cabo Verde’s risk of external debt distress rating is assessed as high, up from the moderate rating in the previous DSA. - Total public debt is expected to reach considerably higher levels over the medium term than projected in the previous Debt Sustainability Analysis (DSA). - While public debt is high, it is overwhelmingly on highly concessional terms. - The high risk assessment is reinforced by risks from a slower-than-expected growth in the Euro area, rising domestic debt, and contingent financial liabilities related to state-owned enterprises (SOEs). - Authorities have taken steps to contain debt distress risk, including faster fiscal consolidation than envisaged in the Medium-Term Fiscal Framework underlying the 2014 Article IV report, and shifting execution of some public investment projects to beyond 2018. - The DSA uses official debt stock data for end-2015 and staff fiscal projections for 2016–19; debt data include central government external and domestic debt and external debt contracted by the central government on behalf of SOEs (onlending). Domestic debt contracted directly by SOEs and local governments with central-government guarantees was estimated at about 6.1 percent of GDP at end-2015 (preliminary data) and was not projected. Key historical debt figures (percent of GDP): - External debt, 2005–15 (selected): 49.6 (2005), 46.2 (2006), 39.9 (2007), 38.4 (2008), 43.9 (2009), 50.7 (2010), 57.2 (2011), 68.1 (2012), 78.3 (2013), 87.9 (2014), 96.9 (2015). - Domestic debt, 2005–15 (selected): 35.7 (2005), 31.7 (2006), 24.7 (2007), 19.1 (2008), 21.3 (2009), 21.7 (2010), 21.6 (2011), 23.0 (2012), 24.2 (2013), 26.6 (2014), 28.9 (2015). - Total public debt increased from about 114.5 percent of GDP in 2014 to an estimated 125.8 percent of GDP at end-2015. External debt profile by creditor type (2015): - Multilateral: Percent of Total External Debt 47, Average Grace Period 9, Average Amortization Period 32, Average Interest Rate 0.9% - Bilateral: Percent of Total External Debt 23, Average Grace Period 8, Average Amortization Period 19, Average Interest Rate 1.1% - Commercial: Percent of Total External Debt 30, Average Grace Period 9, Average Amortization Period 20, Average Interest Rate 1.6% Domestic debt characteristics: - Domestic debt at about 29 percent of GDP at end-2015. - National Pension Fund held about 43 percent of domestic debt at end-2015; the rest held by the banking system. - Treasury bonds make up about 96 percent of domestic debt. - Average maturity of domestic debt at end-2014 was about 7 years and average interest rate was 5.7 percent. - Domestic debt projected to increase gradually, peaking at about 38 percent in 2029 before declining to 35 percent in 2036. Policy performance and thresholds: - Cabo Verde’s three-year average CPIA score is 3.9; rated a strong policy performer. - External public debt burden thresholds for high risk for strong policy performers under the DSF: - Present value of external debt, percent of GDP: 50 - Present value of external debt, percent of exports: 200 - Present value of external debt, percent of revenue: 300 - External debt service in percent of exports: 25 - External debt service in percent of revenue: 22 ### Baseline Scenario Underlying the DSA (Key Assumptions, 2015–20) - Real GDP growth (Current DSA): 1.5 (2015), 3.2 (2016), 3.7 (2017), 4.1 (2018), 4.1 (2019), 4.1 (2020) - GDP Deflator (Current DSA): 0.5 (2015), 0.1 (2016), 1.2 (2017), 1.8 (2018), 2.0 (2019), 2.0 (2020) - Fiscal balance (including grants) (Current DSA): -4.1 (2015), -3.3 (2016), -3.0 (2017), -1.9 (2018), -2.0 (2019), 0.0 (2020) - Overall financing needs (including onlending) (Current DSA): 8.3 (2015), 7.8 (2016), 7.0 (2017), 5.6 (2018), 3.9 (2019), 1.0 (2020) - Current account deficit (including grants) (Current DSA): -4.3 (2015), -7.2 (2016), -8.8 (2017), -8.4 (2018), -7.9 (2019), -7.1 (2020) - Cv$/USD exchange rate (end-of-year) (Current DSA): 101.4 (2015), 100.7 (2016), 100.5 (2017), 100.3 (2018), 99.7 (2019), 99.6 (2020) Box — Baseline narrative assumptions (2016–36): - Real GDP growth picks up after the 2012–15 slowdown and settles at about 4 percent per year in the long term, driven by tourism, better euro-area conditions, resumption of private credit growth, some product diversification, and productivity gains from the PIP and structural reforms. - Fiscal consolidation reduces the fiscal deficit and overall financing needs by 4.1 and 5.9 percent of GDP respectively in 2015–20 per the MTFF; long-run net financing needs projected below 2 percent of GDP per year once consolidation and onlending end. - Non-interest current account deficit widens in 2016–19 due to increased activity, public investment, and FDI, then declines as the PIP winds down. - Consumer price inflation and the GDP deflator are projected not to exceed 2 percent. - Concessionality of new external loans declines significantly starting from 2019, and the baseline assumes a slightly more accelerated move towards non-concessional financing than the previous DSA. - Baseline assumes domestic financing remains below 3 percent of GDP. ### External Public Debt (DSA Results and Risks) - Under the staff baseline, the PV of public and publicly guaranteed (PPG) external debt is expected to peak at 64.4 percent of GDP in 2017, gradually decreasing to below 50 percent by 2023. - Debt service indicators remain safely below thresholds throughout 2036 in the baseline. - Vulnerabilities: - The PV debt-to-exports and debt-to-revenue ratios and the debt service to revenue ratio would breach thresholds under the historical growth (growth slowdown) scenario. - A bound test with a 30 percent nominal depreciation shock in 2016 would cause the PV debt-to-revenue ratio and the debt-service-to-revenue ratio to breach thresholds. ### Total Public Debt (DSA Results and Risks) - Total public debt peaks at about 130 percent, with its present value at 96.1 percent of GDP in 2017, and declines gradually over the projection period. - The PV of total public debt exceeds the 74 percent benchmark and remains above it until 2028. - The debt outlook is vulnerable to: - A prolonged economic slowdown. - Developments in the Euro zone affecting remittances and tourism income. - Realization of losses on contingent liabilities associated with SOEs. - Remittances accounted for roughly 12 percent of GDP in 2015, posing financial stability vulnerabilities if depositors withdraw funds following banking problems. - SOE developments: ELECTRA’s financial situation improved during 2013–15, while TACV’s and IFH’s situations deteriorated sharply. ### Conclusions and Policy Implications - External position in 2015 was broadly consistent with medium-term fundamentals and desirable policy settings; risks appeared low in the external sector assessment. - REER assessment indicates no significant misalignment (both EBA-lite models show misalignments below the 10-percent statistical significance threshold), but moderate cumulative appreciation over the past decade may signal some erosion in competitiveness. - Broader indicators show structural competitiveness issues remain; improving the business environment (access to financing, inefficient bureaucracy, labor flexibility) and increasing productivity of human and physical capital are critical for medium- and long-term growth. - The debt assessment indicates elevated risk of external debt distress (rated high) and a high level of total public debt that requires careful monitoring. - Policy priorities implicit in the assessment: - Continue fiscal consolidation and prioritize the sequencing/timing of public investment projects to contain debt accumulation. - Strengthen monitoring and management of contingent liabilities from SOEs. - Advance structural reforms to improve the business environment, financial market development, labor market flexibility, and innovation capacity to support higher, sustainable growth and buffer debt dynamics. *Source: Appendix I. External Stability Assessment, IMF staff report materials.* ### 11. Public debt sustainability is sensitive to various alternative scenarios and stress tests ### 11. Public debt sustainability is sensitive to various alternative scenarios and stress tests ### Sensitivity of public debt to scenarios and stress tests - The expansion of public debt is most pronounced under the scenario which keeps real growth and the primary balance at historical averages. - A primary balance as high as that over the past decade seems unlikely, given that the primary balance over 2005–14 reflects a temporarily high level of public investment. - Public debt sustainability is sensitive to a depreciation shock. ### Contingent liabilities from state-owned enterprises (SOEs) - At end-2015 (preliminary data), SOE-related contingent liabilities amounted to 25 percent of GDP, up from 9 percent of GDP in 2014. - If the financial situation of SOEs were to deteriorate to such an extent that the central government had to take on all of this debt (and respect the 3 percent limit on domestic financing), debt sustainability would be further jeopardized and the serviceability of public debt would be put under significant strain. ### Comparison with the previous Debt Sustainability Analysis (DSA) - The PV of external debt does breach the threshold under the staff baseline scenario in the current DSA—this was not the case in the previous DSA. - In the previous DSA, the PV of external debt to GDP in 2015 was 48.5. - In the current DSA, the PV of external debt to GDP in 2015 increases to 61.8, breaching the 50 percent threshold. - The debt profile has deteriorated owing to lower than expected nominal GDP and a strong appreciation of the U.S. Dollar. - The authorities’ PIP containment measures were crucial in curbing the PV of external debt to GDP. - In the previous DSA public debt peaked at 108 percent of GDP (in 2016); in the current DSA it reaches 130 percent in 2017. ### The authorities’ views - The authorities broadly concurred with the results of the DSA. - They noted that although the external debt level is high, the public investment scaling up that contributed to it should help increase potential growth and boost revenue in the long term. - The authorities remarked that while the PV of external debt is high, the debt service indicators remain comfortably below the threshold in the baseline scenario. ### Debt distress classification and overall assessment - Based on the external debt burden indicators, the current DSA finds that the risk of debt distress is high but Cabo Verde retains its capability to service its debt. - The PV of external debt to GDP threshold is breached over the 20-year projection period under the baseline scenario, and the breach is significant. - Debt service indicators are comfortably below their respective thresholds. *Source: _cr16366 - 11. Public debt sustainability is sensitive to various alternative scenarios and stress tests* ### 16. The authorities should stay the course on their fiscal consolidation which should help ### 16. The authorities should stay the course on their fiscal consolidation which should help ### Fiscal stance and policy intent - Authorities have embarked on a fiscal consolidation broadly in line with staff advice, "driven in large part by a reduction in externally financed capital spending." - Staff assessment: "The fiscal adjustment envisioned is realistic, and necessary to give a strong message of fiscal responsibility to development partners and investors." - Expected outcome: "set the country on the path to moderate risk of debt distress by 2023." ### Key public and external debt indicators (selected reported values) - External debt (nominal): 99.8, 101.3, 109.8, 110.2, 109.3, 105.9, 101.1, 94.6, 87.2, 60.7, 28.4 (as listed across rows). - Of which: public and publicly guaranteed (PPG) external debt: 78.3, 87.9, 96.9, 98.1, 98.4, 96.2, 92.1, 86.3, 79.7, 55.6, 26.9. - Change in external debt (selected): 6.4, 1.4, 8.5, 0.4, -0.9, -3.4, -4.8, -6.5, -7.4, -4.6, -3.5. - Identified net debt-creating flows (selected): -3.7, 0.4, 16.4, -1.4, -0.4, -0.7, -0.3, -3.1, -6.7, -10.3, -6.8. - Endogenous debt dynamics (selected): -2.9, 1.0, 19.9, -0.5, -0.9, -1.3, -1.2, -1.0, -0.8, 0.2, 0.9. - PV of external debt (selected projection series): 74.7, 75.4, 75.2, 73.5, 71.0, 67.3, 62.8, 46.7, 23.7 (as shown). - PV of PPG external debt (selected): 61.8, 63.3, 64.4, 63.8, 62.0, 59.0, 55.2, 41.6, 22.3. - PV of external debt (in percent of exports, selected): 177.9, 172.9, 167.6, 161.7, 154.6, 145.6, 136.1, 98.2, 49.1. - Debt service-to-exports ratio (in percent, selected): 7.0, 8.8, 8.7, 10.5, 10.6, 10.8, 10.8, 11.7, 12.5, 12.7, 10.3. - PPG debt service-to-revenue ratio (in percent, selected): 10.9, 10.9, 11.1, 11.8, 11.8, 12.2, 12.2, 13.9, 15.4, 16.7, 13.3. - Total gross financing need (Billions of U.S. dollars) (selected): 0.0, 0.1, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1, 0.0, -0.1, -0.1. ### Macroeconomic assumptions underpinning projections (selected) - Real GDP growth (in percent): 0.8, 1.9, 1.5, 3.4, 3.7, 3.2, 3.7, 4.1, 4.1, 4.1, 4.1, 3.9, 4.0, 4.0, 4.0. - GDP deflator in US dollar terms (change in percent, selected): 4.8, 0.0, -16.1, 0.9, 8.8, -1.6, 1.8, 1.9, 2.4, 2.6, 2.0, 1.5, 2.0, 2.0, 2.0. - Effective interest rate (percent, selected and later projections): 2.3, 2.8, 1.9, 3.8, 1.2, 2.7, 2.8, 2.9, 3.0, 3.1, 3.2, 2.9, 4.3, 7.1, 5.1. - Growth of exports of G&S (US dollar terms, in percent, selected): 10.5, 2.8, -24.7, 8.1, 19.4, 5.4, 8.6, 7.4, 7.8, 7.5, 6.1, 7.1, 6.2, 6.3, 6.4. - Growth of imports of G&S (US dollar terms, in percent, selected): -2.5, 6.4, -23.7, 5.4, 18.2, 10.1, 9.1, 8.2, 8.3, 1.6, -1.3, 6.0, 5.6, 6.0, 5.3. - Grant-equivalent financing (in percent of GDP, selected): 6.9, 4.7, 3.8, 3.2, 2.2, 1.8, 1.5, 1.1, 1.4. ### Public sector debt profile (selected values from public-sector DSA) - Public sector debt (row of multiple values): 102.5, 114.5, 125.8, 129.1, 130.2, 128.5, 124.7, 118.5, 113.4, 93.2, 62.3. - Of which: foreign-currency denominated (selected): 78.3, 87.9, 96.9, 98.1, 98.4, 96.2, 92.1, 86.3, 79.7, 55.6, 26.9. - Change in public sector debt (selected): 11.4, 12.0, 11.3, 3.4, 1.1, -1.7, -3.9, -6.1, -5.2, -3.8, -2.8. - Identified debt-creating flows (selected): 8.6, 18.1, 17.1, 1.9, 0.1, -2.6, -4.8, -7.0, -5.5, -3.7, -2.3. - Primary deficit and related (selected): Primary deficit 11.4, 8.5, 5.1, 6.3, 4.7, 4.0, 3.8, 2.4, 0.8, -2.1, -1.0, 1.3, -0.4, -0.5, -0.4; Revenue and grants 24.5, 22.6, 26.2, 27.4, 26.0, 26.0, 26.1, 26.0, 25.7, 25.1, 24.7. - PV of public sector debt (selected): 90.7, 94.3, 96.1, 96.1, 94.5, 91.2, 88.9, 79.2, 57.6. - Gross financing need (selected, percent): 18.5, 13.9, 12.5, 11.5, 11.4, 10.1, 8.4, 5.9, 7.3, 7.9, 6.5. ### Stress tests and sensitivity analysis (selected outcomes and diagnostics) - The most extreme stress test is identified as the test that yields the highest ratio on or before 2026; for several indicators this corresponds to a One-time depreciation shock (e.g., figure captions), and in other figures to an Exports shock or Combination shock as specified in the figure notes. - Table 1b (sensitivity): Baseline and scenario values for PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue (examples shown across years). Example baseline rows (PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue): Baseline 63 64 64 62 59 55 42 22 (as listed across 2016–2036 table header); sensitivity under A2, B1–B6 provide ranges including large increases under shocks (e.g., one-time 30 percent nominal depreciation in 2017 produces higher ratios). - Table 1b bound tests include shocks: B1. Real GDP growth at historical average minus one standard deviation; B2. Export value growth at historical average minus one standard deviation; B3. US dollar GDP deflator at historical average minus one standard deviation; B4. Net non-debt creating flows at historical average minus one standard deviation; B5. Combination of B1–B4 using one-half standard deviation shocks; B6. One-time 30 percent nominal depreciation relative to the baseline in 2017. - Table 2b public-debt sensitivity scenarios include: A1. Real GDP growth and primary balance at historical averages; A2. Primary balance unchanged from 2016; A3. Permanently lower GDP growth; B1–B5 bound tests including one-time 30 percent real depreciation and a 10 percent of GDP increase in other debt-creating flows. ### Observations reflected in the DSA tables and figures - Multiple indicators show declining debt ratios over the medium to long term under the baseline projection path (selected PV and projection values). - Stress scenarios (notably large depreciation and export shocks) produce materially higher debt and debt-service ratios on or before 2026, identified as the most extreme stress tests in the figures and tables. - Grant elements and concessional financing compose a meaningful share of new borrowings in the projection years (grant-equivalent financing and grant element shares reported in tables). ### Policy implications and recommendations (as reported) - Continue fiscal consolidation to support debt sustainability objectives and to signal fiscal responsibility to development partners and investors. - The fiscal consolidation, centered on reductions in externally financed capital spending, is described as realistic and necessary to lower the risk of debt distress to a moderate level by 2023. *Source: IMF staff report excerpt and debt sustainability analyses from the provided Cabo Verde informational annex and DSA tables.* ### 1. Systematic Country Diagnostic November 2016 Summer 2017 ### 1. Systematic Country Diagnostic November 2016 Summer 2017 ### Statistical issues (Data adequacy and quality) - General assessment - "Data provision has some shortcomings but is broadly adequate for surveillance." - Statistical system suffers from a shortage of financial and human resources. - A comprehensive master plan has been developed under the direction of the National Statistical Institute (INE). - National accounts - Significant improvements made with IMF STA technical assistance; timely release of quarterly and yearly GDP data. - Most recent annual GDP data released are for 2015 (released in March 2016). - Implemented GDP at chained prices (1993 SNA) and changed base year from 1980 to 2007. - Annual accounts based on new methodology first presented in July 2013 (for 2011 and backward projections for 2002–10). - Quarterly production approach national accounts published for the first time in April 2015. - Future TA will work on a GDP rebasing and developing expenditure-side GDP estimates. - Full implementation of 2008 SNA and quarterly accounts requires substantial improvement in source data collection; INE capacity currently limited. - Recommendation: greater prioritization among data collection and TA on preliminary estimation/extrapolation from random sampling surveys. - Price statistics - Revamped CPI with new methodology launched in February 2008; previous weights dated to 1989. - CPI published monthly and in a timely manner. - Government finance statistics (GFS) - GFS compilation system being upgraded; recent TA helped compile GFS in line with GFSM 2001. - Authorities started reporting GFS for publication in the IFS and the GFS Yearbook. - Quality concerns: statistical discrepancies; flows and stocks not always consistent; tax arrears and overdue tax credits/refunds need better measurement and integration; institutional coverage needs extension; donor reporting delays affect accuracy. - Weaknesses persist regarding public and publicly guaranteed debt of state-owned enterprises. - Monetary and financial statistics - Monetary statistics adequate; SRFs finalized with STA; SRF-based data published in IFS since June 2007. - Integrated monetary database meeting STA, AFR, and BCV needs is in place. - Cabo Verde does not report financial soundness indicators for dissemination on IMF’s website. - External statistics - BCV compiles BOP and IIP on a BPM5 basis; quarterly BOP dissemination regular; participation in CDIS starting with 2012 data. - Expanded data sources via surveys and International Transactions Reporting System; largely follows BPM6 recommendations. - Remaining limitations: coverage for foreign trade in goods, direct investment, portfolio investment liabilities, and nonbank sectors’ external transactions conducted via accounts abroad. ### Data standards and publication practices - Cabo Verde has participated in the General Data Dissemination System (GDDS) since February 2004. - "No data ROSC has been done in Cabo Verde." ### Key indicator reporting (selected items from Table 2; dates as of October 26, 2016) - Exchange rates: Date of Latest Observation 10/30/16; Date Received 10/30/16; Frequency of Data/Reporting/Publication: D / D / D. - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 7/31/16; Date Received 09/08/16; Frequency: D / W / M. - Reserve/base money: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: D / W / M. - Broad money: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: M / W / M. - Central bank balance sheet: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: D / W / M. - Consolidated balance sheet of the banking system: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: M / M / M. - Interest rates: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: M / M / M. - Consumer price index: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: M / M / M. - Revenue, expenditure, balance, and composition of financing—central government: Date of Latest Observation 7/31/16; Date Received 9/10/16; Frequency: M / Q / A. - Stocks of central government and central government-guaranteed debt: Date of Latest Observation 12/31/15; Date Received 9/10/16; Frequency: A / A / A. - External current account balance: Date of Latest Observation 6/30/16; Date Received 9/10/16; Frequency: Q / Q / Q. - Exports and imports of goods: Date of Latest Observation 6/30/16; Date Received 9/10/16; Frequency: Q / Q / Q. - GDP/GNP: Date of Latest Observation 6/30/16; Date Received 9/10/16; Frequency: Q / Q / Q. - Gross external debt: Date of Latest Observation 12/31/15; Date Received 9/10/16; Frequency: Q / A / A. - International Investment Position: Date of Latest Observation 6/30/16; Date Received 9/10/16; Frequency: Q / Q / Q. ### Statement by Alexandre Tombini and Pedro Fachada (Executive Directors) — macroeconomic overview and policy priorities - Political and institutional context - 2016: presidential, legislative, and local elections. New government formed in April after March parliamentary elections. - Authorities emphasize commitment to promoting a larger role for the private sector and advancing fiscal consolidation. - Recent economic developments - Long-term growth history: "After growing by 7.4 percent on average during the period 1993–2008, the Cabo Verdean economy decelerated significantly" post-global financial crisis. - Growth 2009–2015: "real GDP growth averaged a mere 1.3 percent annually." - 2016 rebound: GDP grew by "4.7 percent in the first half of 2016 relative to the same period of last year." - Tourism activities grew by "15.2 percent"; agriculture and public utilities grew at double-digit rates. - Confidence indicators: INE’s Economic Situation Indicator reached highest level since mid-2012 in Q3 2016; tourism sector confidence highest since end-2008. - Credit: credit to the private sector grew by "4.1 percent" in the first eight months of 2016 after stagnation 2013–2015. - Inflation: ended 2015 with annual deflation of "0.5 percent"; consumer prices fell by "2.0 percent in the 12 months through September" 2016. - Current account improvement: "4.3 percent of GDP in 2015 compared to 9.0 percent of GDP in 2014 and 16.3 percent of GDP at the peak in 2011." - Reserves: "gross international reserves accumulated and are expected by staff to end the year close to six months of prospective imports of goods and services." - Fiscal policy and public investment - Authorities accelerating pace of consolidation; large fiscal deficits in recent years mainly driven by capital spending. - Public investment program size: - Peak in 2012: "capital spending represented 11.8 percent of GDP." - Declined to "4.6 percent of GDP in 2015." - Expected to reach "around 2 percent of GDP by 2020." - Overall deficit: reached "10.3 percent of GDP in 2012"; estimated to converge to a balanced position by the end of the decade. - Revenue measures: ongoing efforts to broaden tax base, enhance collection, recover tax arrears, and strengthen DNRE capacity with Fund TA. - SOE fiscal risks: - Electra: financial situation has "improved substantially." - TACV: financial difficulties remain unresolved; inter-island air transport considered a public good and fiscal constraint on tourism. - IFH (Imobiliária, Fundiária e Habitat): concerns due to weaknesses in an externally-financed project under reevaluation. - Debt sustainability: authorities note "public debt ratio is high" but no major sustainability concern; most public debt is external and concessional. Quoting staff DSA: external "debt service indicators remain safely below the threshold throughout 2036" (page 5, emphasis added). - Monetary policy and financial stability - Exchange rate peg to the euro supported successfully; "exchange rate is broadly in line with fundamentals and that international reserves coverage is strong." - Monetary policy stance since 2013: accommodative. - Policy rate lowered to "3.5 percent" in February 2015 and remained unchanged since then. - Reserve requirements reduced to "15 percent from 18 percent" in February 2015. - Deflation noted to increase real incomes and support consumption. - Banking sector: relatively well capitalized and liquid. - Non-performing loans had a mid-2014 peak of "22.3 percent" and have declined but remain relatively high. - BCV measures: extended liquidation period for repossessed assets from NPLs from two to five years; continued strengthening of regulation, supervision, and crisis resolution frameworks. - AML/CFT framework comprehensive; no loss of correspondent banking relationships reported. - Structural agenda and growth prospects - Constraints: resource-poor, geographically dispersed, scarce arable land, low rain levels, prone to natural disasters. - Growth engines: tourism and tourism-related FDI. - Tourism-related FDI magnitude: already signed projects estimated to represent "42 percent of GDP"; additional projects in pipeline amounting to "around 50 percent of GDP." - Labor market reform: new labor code entered into effect last October; increases labor market flexibility by extending conditions/time period for temporary contracts and facilitating dismissals for redundancy or performance. - Authorities aim to crowd-in private investment, explore PPPs and privatizations, and catalyze diaspora investment. - Final remarks by authorities - Authorities consider staff’s short-term growth forecast "to be on the low side." - Completion of public investment program and crowding-in private investment expected to provide foundations for higher potential growth than recent performance; authorities believe this may not be fully captured in staff’s long-term projections. - Reiterated importance of Fund engagement and TA in tax administration, debt management, and macroeconomic statistics. *Source: _cr16366 - 1. Systematic Country Diagnostic November 2016 Summer 2017* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16366.pdf_