Press Release No. 06/172

Press Release No. 06/172

The Executive Board of the International Monetary Fund (IMF) has approved a three-year Policy Support Instrument (PSI) for Cape Verde under the IMF's newly created PSI framework, which is intended to support the nation's economic reform efforts.

Cape Verde's PSI is designed to enhance the sustainability of growth and development by maintaining a stable macroeconomic environment and moving forward with structural reforms. Specific attention is given to reducing fiscal risks and giving Cape Verde a margin of safety to protect the economy against exogenous shocks. Approval of a PSI for Cape Verde signifies IMF endorsement of the policies outlined in the program.

The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program. (see Public Information Notice No. 05/145).

Following the Executive Board's discussion of Cape Verde, on Monday, July 31, 2006, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"Cape Verde's economic and policy performance remains sound. GDP growth is estimated to have reached nearly 6 percent in 2005, supported by strong private and public investment. The favorable investment outlook—especially in tourism and infrastructure development—bodes well for growth in the years ahead. While inflation has picked up recently, influenced by temporary increases in food prices and higher international oil prices, it is expected to fall sharply over the coming year.

"Underpinning Cape Verde's positive economic climate, the government has shown a clear commitment to maintain prudent macroeconomic policies and push ahead with structural reforms. Key support for growing policy credibility has come from the build-up of foreign exchange rate reserves to back the fixed exchange rate peg to the euro; from improvements in fiscal discipline; and from progress with privatization and other measures to improve economic efficiency and reduce fiscal risks.

"The priorities in the program supported by the three-year Policy Support Instrument are to further increase foreign reserve coverage and create fiscal space in anticipation of possible pressures on public spending or financing. Specific measures include reducing domestic debt as a share of GDP, rationalizing tax exemptions, and better prioritizing public spending.

"The new program also emphasizes public sector and regulatory reforms. Particular attention will be given to strengthening public sector financial management and civil service capacities; improving the regulatory framework for the energy sector, including through full implementation of the tariff adjustment mechanisms for electricity and water; and ensuring that financial sector development, especially in the rapidly growing offshore financial sector, takes place in line with international best practice," Mr. Carstens said.

ANNEX

Recent Economic Developments

Cape Verde's economic and policy performance has strengthened significantly in the recent years, supported by reforms pursued under the country's first Poverty Reduction and Growth Facility (PRGF) arrangement. International reserves have increased, adding credibility to the exchange rate peg to the euro. The fiscal position has improved and, in a marked break from the past, fiscal restraint held firm through the recent elections. Privatization and other structural reforms are moving ahead. Reflecting the improved policy environment, growth has averaged around 5 percent since 2000, supported by strong inflows of external financing from both private and official sources.

Program Summary

Cape Verde's program under the PSI aims to provide a consistent and coherent economic policy framework to underpin the Government's medium-term development objectives. Key policy measures in the program include:

• Increasing foreign exchange coverage to strengthen further the credibility and resilience of the exchange rate peg;

• Decreasing the burden of domestic debt and clearing remaining domestic arrears;

• Strengthening public finance management capacity, expenditure control, and revenue performance;

• Pursuing structural reforms to reduce fiscal risks and support efficiency improvements in the economy;

• Regulatory reforms to ensure that financial sector development takes place within a sound institutional framework

Cape Verde: Selected Economic and Financial Indicators, 2002-06
	2002	2003	2004	2005	2006
					Proj.
	(Percentage change unless otherwise stated)
National accounts and prices
Real GDP	5.3	4.7	4.4	5.8	5.5
Real GDP (per capita)	3.4	2.8	2.5	3.8	3.5
Consumer price index (annual average)	1.9	1.2	-1.9	0.4	6.2
Gross capital formation (percent of GDP)	35.8	31.0	36.8	37.9	38.7
Gross national savings (percent of GDP)	24.4	20.0	22.4	33.3	31.8
Money and credit
Net foreign assets	18.6	-7.7	31.9	58.8	19.0
Credit to nongovernment	12.0	15.2	9.3	9.2	13.7
Broad money (M2)	14.3	8.6	10.5	15.5	13.6
Central government
Total revenue (percent of GDP)	22.9	22.0	23.2	24.1	25.1
Total grants (percent of GDP)	8.7	5.5	10.9	7.1	9.0
Total expenditure (percent of GDP)	34.4	31.1	36.1	36.3	41.2
Overall balance (including grants, percent of GDP)	-2.9	-3.5	-2.0	-5.1	-7.1
External debt (percent of GDP)	56.4	57.5	54.0	55.4	52.4
Net domestic debt (percent of GDP)	29.2	27.3	35.0	32.7	27.2
External
Exports of goods and services (local currency)	14.1	6.1	5.2	20.5	8.9
Imports of goods and services (local currency)	15.3	7.5	6.5	0.5	14.6
Real effective exchange rate (annual average)	0.5	1.8	-2.9	-2.1	...
Overall balance of payments (percent of GDP)	6.3	-0.7	4.1	5.7	2.2
Current account balance (including current grants, percent of GDP)	-11.4	-11.1	-14.4	-4.6	-6.9
Gross reserves (months of prospective imports)	1.9	1.7	2.4	3.0	3.1
External debt service (percent of exports)	12.4	10.5	11.3	8.8	8.2
Sources: Cape Verdean authorities, and staff estimates and projections.