News Brief No. 00/13

News Brief: IMF Completes Cape Verde Third Review Under the Stand-By Arrangement

March 6, 2000

The Executive Board of the International Monetary Fund (IMF) today completed the third review under the Stand-By Arrangement for Cape Verde.

In commenting on the Executive Board's discussion of the review, Eduardo Aninat, Deputy Managing Director of the IMF, made the following statement:

"The Executive Board has concluded the third review under Cape Verde's Stand-By Arrangement that was approved in February 1998. Under the Stand-By Arrangement, Cape Verde has made progress in macroeconomic stabilization and structural reform. Real GDP growth reached 8 percent both in 1998 and 1999, and inflation was halved to some 4 percent between 1997 and 1999. However, in large part because of factors beyond the authorities' control, fiscal slippages occurred in the second half of 1999, which led, under the exchange rate peg, to declines in international reserves and a temporary reintroduction of foreign exchange rationing. The corrective measures taken by the authorities at year's end, together with privatization revenues, succeeded in reducing macroeconomic imbalances and eliminating the need for foreign exchange rationing.

"The 2000 budget reflects the authorities' commitment to prudent fiscal policies. Expenditure restraint will be critical in its implementation, although the limited room for maneuver is noted. Active monetary policies will also be critical in enhancing the credibility of the exchange rate peg and boosting further official international reserves.

"In the area of structural reforms, the authorities' intention to accelerate the privatization process is welcome. Programmed transfers from privatization receipts and donor assistance should make the Trust Fund for domestic debt reduction fully operational by end-2000. The continued progress with external trade liberalization is also welcome. In continuing this process, the authorities are encouraged to consider accelerating the timetable for external tariff and VAT reform, for which preparations are already being made.

"Given Cape Verde's vulnerability to external shocks, which affect most severely the poor, further development of poverty alleviation plans within a consistent macroeconomic framework would be desirable. The forthcoming Article IV consultation will provide an opportunity to explore the timetable for a possible program that could be supported by the Poverty Reduction and Growth Facility," Aninat said.