IMF Executive Board Approves a New Policy Coordination Instrument with Cabo Verde

IMF News, July 15, 2019

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On July 15, 2019, the Executive Board of the International Monetary Fund approved a new Eighteen-Month Policy Coordination Instrument (PCI) with Cabo Verde.
The PCI does not involve the use of IMF financial resources; it establishes a framework for semi-annual fixed-schedule program reviews to signal the authorities’ commitment to macroeconomic policies and structural reforms.

Economic growth:
- Output growth rose from 1 percent in 2015 to above 5 percent in 2018.
- Growth is projected at 5 percent for 2019.
Inflation:
- Inflation has been subdued, with a spike in 2018 attributed to higher food and fuel prices.
- Inflation is expected to remain low in 2019.
External sector:
- The external current account deficit narrowed in 2018, mostly reflecting strong export performance and higher remittances.
- Gross international reserves are projected to remain above 5 months of prospective imports of goods and services.
Public finances and debt:
- The fiscal deficit declined from 4.6 percent of GDP in 2015 to 2.8 percent of GDP in 2018.
- The fiscal deficit is projected at 2.2 percent of GDP for 2019.
- The risk of external and overall debt distress is assessed as high, unchanged compared with the 2018 Debt Sustainability Analysis carried out by the staffs of the IMF and the World Bank.

Positive drivers:
- Robust growth supported by industry and services sectors and strong domestic demand.
- Revenue-enhancing measures and expenditure controls that helped put public finances on a stronger footing and reduce the public debt-to-GDP ratio in the last three years.
- Privatization of the national airline company in 2018 and early 2019, and additional SOE restructuring measures planned for 2019-20, are expected to reduce fiscal risks from loss-making State-Owned Enterprises (SOEs).
Remaining risks:
- Downside risks to the outlook remain.
- The risk of external and overall debt distress is high, requiring continued fiscal consolidation and reliance on concessional borrowing.

Purpose:
- To build on the authorities’ reform program under the Strategic Plan for Sustainable Development (PEDS).
- To bolster macroeconomic stability through fiscal consolidation and growth-enhancing reforms to support medium-term fiscal and debt sustainability.
Fiscal anchors and SOE reform:
- The fiscal program will be anchored by improvement in the primary balance and the elimination, over time, of budget support to loss-making SOEs as reforms advance.
Program monitoring:
- Program reviews will take place on a semi-annual fixed schedule.
- Successful completion of reviews is intended to signal Cabo Verde’s commitment to continued strong macroeconomic policies and structural reforms.

Monetary policy:
- The monetary policy stance is assessed as appropriate and consistent with protecting the exchange rate peg and price stability.
- The Banco de Cabo Verde’s recent decision to reduce the overnight interest rate corridor is expected to improve the monetary policy transmission mechanism.
- Recommendation: The BCV should continue efforts to increase communication on its policy direction.
Financial sector:
- Recommendation: The BCV should continue strengthening banking supervision and take appropriate actions for a continued reduction in non-performing loans.

Continue fiscal consolidation to support medium-term fiscal and debt sustainability.
Pursue decisive progress in public enterprise (SOE) reform, including further restructuring and privatization where appropriate.
Rely on concessional borrowing to manage debt vulnerabilities.
Strengthen monetary policy communication and transmission.
Strengthen banking supervision and reduce non-performing loans.
Implement growth-enhancing reforms to increase inclusive growth.

Press Release No. 19/278, July 15, 2019. International Monetary Fund.