On July 15, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Cabo Verde.

Cabo Verde’s macroeconomic situation has improved significantly in recent years, and the outlook is positive despite downside risks. Economic growth has been robust and is projected at 5 percent for 2019, while inflation is expected to remain low. The fiscal deficit has declined from 4.6 percent of GDP in 2015 to 2.8 percent of GDP in 2018 and is projected at 2.2 percent of GDP for 2019. Fiscal risks generated by loss-making State-Owned Enterprises (SOEs) are expected to subside, reflecting the impact of reforms put in place in 2018 and early 2019, notably the privatization of the national airline company, as well as additional SOEs restructuring measures planned for 2019-20. The external position is projected to strengthen further, with gross international reserves remaining above 5 months of prospective imports of goods and services. Cabo Verde’s 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.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the economic reform agenda and sound policies that have underpinned a significant improvement in the macroeconomic situation in recent years, as evidenced by higher growth, continued low inflation, and improved fiscal and external positions. The outlook is favorable though there are risks, and Directors underscored the need for continued sustained structural reforms and prudent macroeconomic policies to address the significant challenges stemming from high public debt, lack of economic diversification, and vulnerability to natural disasters.

Directors welcomed the request for a Policy Coordination Instrument (PCI) and considered that the authorities’ economic and financial policy program would enhance macroeconomic stability and help sustain inclusive growth. They stressed that good performance under the PCI would play an important signaling role for the authorities’ commitment to sound policies and reforms to address the country’s developmental challenges.

Considering the high level of debt and high risk of debt distress, Directors stressed the need for sustained fiscal consolidation efforts. In this context, Directors underlined that sustained improvement in revenue mobilization—by combating tax evasion, broadening the tax base, and streamlining exemptions—and continued expenditure restraint are essential to preserve the significant gains made in the last three years and create fiscal space for priority spending. In particular, Directors emphasized that the elimination of budget transfers to and further reform of state-owned enterprises (SOEs) was necessary to reduce fiscal risks and safeguard debt sustainability.

Directors noted that the peg to the euro has served the country well. They observed that in the current environment of low inflation and adequate level of international reserves, the currently accommodative monetary policy stance remains appropriate. Directors noted, however, that the central bank should continue to monitor developments in the global economy and stand ready for any corrective action if necessary. Directors welcomed the measures taken recently by the central bank to improve the monetary policy transmission mechanism and welcomed efforts to further enhance communications on policy direction.

Directors underscored the improvement of Cabo Verde’s external position and noted that the change of staff’s External Stability Assessment compared with last year, stemmed from the use of an additional methodological approach.

Directors welcomed the improvement in financial stability indicators and called for measures to reduce the high level of non-performing loans. They encouraged the central bank to continue enhancing banking supervision, advance the preparation of a credit information system to facilitate banks’ assessment of creditworthiness, and work with banks on the recovery of collaterals, particularly for legacy loans. Directors welcomed further efforts to improve the AML/CFT framework.

Directors stressed the importance of continued progress in the implementation of reforms to improve the business environment. In particular, they highlighted the need for further progress in SOEs’ reforms, enhanced monitoring of their financial situation and performance, and implementation of measures to support small-and-medium sized enterprises’ development. They called for actions to facilitate access to finance, notably by setting up a central registry for mobile collateral, to increase financial literacy through training, and to build skills through the expansion of access to vocational schools.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.