Press Release No. 05/65

The following statement was issued today in Praia, Cape Verde by an International Monetary Fund (IMF) staff mission:

"An IMF staff team has concluded a mission to Cape Verde to conduct the final review of Cape Verde's IMF-supported Poverty Reduction and Growth Facility (PRGF), and to assess Cape Verde's economic and policy prospects over the medium term. Conclusion of the review by the IMF's Executive Board, which could take place late May 2005, would make available SDR 1.26 million (about US$1.9 million), and would bring the total amount drawn by Cape Verde under the arrangement to SDR 8.64 million (about US$13.2 million).

The mission thanks the authorities for the positive climate of the discussions.

"Cape Verde's economic and policy performance continues to be sound. Real GDP growth is estimated to have been about 4½ percent in 2004 and is projected to pick up to around 6 percent in 2005, with inflation remaining low. This favorable outlook is supported by strong public and private investment, directed largely toward infrastructure development and the tourism sector, and backed by higher external support. Under the same influences, the medium-term growth outlook of 6 to 7 percent envisaged in the government's recently released Poverty Reduction Strategy Paper (PRSP) appears achievable.

"The fiscal outturn in 2004 was better than expected, and the mission supports the prudent stance evident in the 2005 budget. Public revenues over the next few years should rise with the overall growth of the economy, and there is also scope for revenue gains through further improvements in tax administration and rationalization of tax exemptions. Furthermore, Cape Verde's strong policy performance and high standards of governance should enable it to continue attracting substantial external grants and concessional financing. Drawing on these domestic and external resources, public spending should be directed toward the priority areas set out in the PRSP-notably education, health, infrastructure, and capacity building.

"In the context of the fixed exchange rate peg to the euro, which has served Cape Verde well, monetary policy is appropriately focused on the maintenance of price stability and a steady buildup in international reserves. The mission supports the recent decision by the Bank of Cape Verde to ease the monetary policy stance, which has been followed by a reduction in lending rates by the main commercial banks.

"The IMF mission has urged the government to press ahead with its program of restructuring and privatizing public enterprises, which will be supported by the improvements under way in the underlying regulatory framework. Also important is a rapid resolution to the long-standing difficulties between the government and Electra, accompanied by implementation of an automatic mechanism to adjust electricity and water tariffs on the basis of costs. Such steps would reduce fiscal risks and enable Electra to expand its electricity and water capacities to meet growing demands.

The Cape Verde's PRGF arrangement, its first, was approved in 2002 (see Press Release No. 02/18). The government has indicated an interest in a successor arrangement to start this year."

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