An International Monetary Fund (IMF) staff team led by Max Alier visited
Praia from January 15–26, 2018, to conduct discussions on the 2018 Article
IV consultation.
At the conclusion of the visit, Mr. Alier issued the following statement:
“The economic recovery is gaining momentum reflecting a more favorable
external environment and the payoff of ongoing economic reforms. In 2017,
the economy is estimated to have expanded by 4 percent supported by the
double digit-growth in tourist arrivals, the recovery in credit to the
private sector, and stronger consumer and business confidence. These
factors are expected to boost growth further to 4.3 percent in 2018. Over
the medium term real GDP growth is projected to stabilize at around 4
percent underpinned by investor confidence stemming from the decisive
implementation of the authorities’ reform program.
“Cabo Verde achieved an impressive fiscal consolidation in recent years but
reducing public debt has proven difficult, owing in part to the
depreciation of the escudo vis-à-vis the US dollar but also reflecting the
need to support loss-making state-owned enterprises (SOEs). In 2017, the
budget deficit is estimated to have narrowed to 3 percent of GDP and public
debt to have declined to 126.5 percent of GDP, the first decline in a
decade. The 2018 budget deficit target of 3.1 percent of GDP is feasible
but will require decisive efforts to continue strengthening the tax and
customs administration directorate, and ensuring that the public assets
sales delayed last year materialize in 2018.
Going forward, the team recommends deepening fiscal consolidation efforts
and accelerating the restructuring of SOEs. Eliminating their need for
government support, in particular for the airline (TACV), housing (IFH) and
power (ELECTRA) companies would open room for faster growth in credit to
the private sector, boost investor confidence, accelerate medium-term
growth, put public debt on a downward path, and reduce the risk of external
debt distress.
“The success of the fiscal strategy hinges on structural reforms to
strengthen fiscal institutions and contain fiscal risks. Plans to approve a
new organic budget law aimed at broadening the coverage of the budget to
include the non-financial public sector, and introducing a debt ceiling are
welcome. In order to strengthen domestic revenue mobilization, the team
recommends revisiting existing tax expenditures and avoiding granting
additional tax exemptions that erode the tax base.
“The Banco de Cabo Verde’s (BCV) monetary policy stance has been
appropriate in the absence of pressures on reserves and consistent with the
objective of protecting the peg. Measures adopted last June to strengthen
the monetary transmission mechanism are welcome.
“Plans to adopt a new foreign exchange law and a new BCV organic law are
welcome. Consolidating the existing foreign exchange legislation and
liberalizing the already de facto open capital and financial accounts will
support efforts to further integrate Cabo Verde in the global economy.
“The team welcomes the BCV’s efforts to strengthen banking sector
regulation and supervision. Financial stability indicators have improved
but the high level of non-performing loans (NPLs) and low profitability
need to be addressed. A solution to the high level of legacy NPLs should be
a priority and further forbearance of requirements to write off
irrecoverable loans should be avoided.
“The loss of correspondent banking relations (CBRs) represents a
vulnerability given Cabo Verde’s reliance on migrant remittances and
deposits. Preventing and possibly reversing the loss of CBRs over time
would be facilitated by strengthening ongoing measures for an effective
cooperating with other jurisdictions on tax issues.
“Steady implementation of structural reforms is critical to boost potential
growth, foster job creation, and reduce poverty. Improving the quality of
education and training are central to increase productivity and address the
high levels of youth and women unemployment. Adequately protecting the poor
requires strengthening and improving the targeting of social program and
protecting social spending from the fiscal consolidation efforts.
“The team met with Prime Minister Ulisses Correia e Silva, Deputy Prime
Minister and Minister of Finance Olavo Correia, Minister of Tourism,
Transport, and Maritime Economy José Gonçalves, Central Bank Governor João
Serra, other government officials of the executive branch and state-owned
enterprises. The team also met with members of the Finance Commission of
the National Assembly, representatives of labor unions, development
partners, and the private sector. The team thanks the authorities for their
cooperation and hospitality.”
The IMF Executive Board is expected to discuss the 2018 Article IV
consultation in March 2018.
