IMF Staff Completes 2019 Article IV Mission to Cabo Verde

IMF News, March 26, 2019

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Real gross domestic product (GDP) expanded by 4 percent in 2017, and by an estimated 4.7 percent in 2018.
For 2019 and the medium term, real GDP growth is forecasted in the range of 4.8 to 5 percent.
Enhancing growth prospects to reach 5 percent will require sustained implementation of wide-reaching reforms to address long-standing impediments to growth, improve the business environment and attract foreign direct investment.
The recent privatization of the national airline company (TACV) is described as a welcome development.

The current account deficit narrowed to 4.5 percent of GDP in 2018 (6.6 percent of GDP in 2017) owing to strong export performance, increased remittances, and deceleration in imports demand.
An agreement between Cabo Verde and the European Union for fish exports is cited as a welcome development.
Gross international reserves increased and reached 5.1 months of prospective imports at end-December 2018.

The overall deficit declined from 3 percent of GDP in 2017 to an estimated 2.8 percent of GDP in 2018, mostly because of strong revenue performance and revenue administration measures.
Financing needs rose from 3.4 percent of GDP to 3.9 percent of GDP as budget support to financially-strained State-owned enterprises (SOEs) increased.
For 2019, the budgeted deficit of 3 percent of GDP is stated as achievable through effective implementation of revenue measures contemplated in the budget and expenditure restraint.
The stock of public debt is estimated at 125 percent of GDP at end-December 2018, down from 127 percent in 2017.

Financial stability indicators improved in 2018, and banks’ profitability increased.
Non-performing loans (NPLs) declined in 2018 but remained high at 12.2 percent of total loans at end-December 2018.
Resolution of legacy loans linked to the 2008 financial crisis is highlighted as an important priority.
The central bank (BCV) is advised to continue strengthening banking sector supervision.

The monetary policy stance is described as appropriate given low inflationary pressures and the level of international reserves, but continued caution is recommended.
The BCV should continue monitoring developments in the Euro area closely and stand ready to change the monetary policy stance as needed.
The BCV should continue to maintain a high level of reserves to protect the peg and increase the economy’s resilience to adverse shocks.
Further actions are needed to strengthen the monetary policy transmission mechanism to enhance the efficiency of monetary policy.

Continued progress in SOE reforms is deemed critical to reduce fiscal risks, support medium-term debt sustainability and economic growth.
Priorities include completing the SOE reform agenda to eliminate the drain on budgetary resources, put public debt on a sustained downward trend, and reduce the risk of debt distress over the medium term.
Other priority structural reforms identified: improving the quality of education, supporting vocational training, increasing financial literacy for micro as well as small-and-medium sized enterprises, and measures to improve financial inclusion.

An IMF staff team led by Malangu Kabedi-Mbuyi visited Praia during March 10-25, 2019 for the 2019 Article IV consultation and discussions on medium-term policy initiatives and reforms.
The team met with Prime Minister Ulisses Correia e Silva; Deputy Prime Minister and Minister of Finance Olavo Correia; Minister of Industry, Trade and Energy Alexandre Dias Monteiro; Minister of Agriculture and Environment Gilberto Silva; Central Bank Governor João Serra; the President of the Municipality of the Island of Sal Julio Lopes; other government and SOE senior officials; and representatives of labor unions, non-government organizations, development partners, and the private sector.
Further discussions on identified reforms will take place in Washington D.C. in the coming weeks.
The IMF Executive Board is expected to discuss the 2019 Article IV consultation report in June 2019.

Imf Communications Department — Press Release No. 19/97, March 26, 2019.