IMF staff and the Cabo Verdean authorities have reached a staff-level agreement on economic policies to conclude the second review of the ECF-supported program, which would allow releasing US$6.08 million in financing. The IMF Executive Board will consider the review in the coming weeks; Cabo Verde was hit hard by the effects of COVID-19 and the impact of the war in Ukraine. The economy rebounded strongly in 2022, supported by a recovery of tourism; Cabo Verde remains vulnerable to economic and climate-related disruptions, and the gains achieved need to be sustained beyond the medium-term horizon to safeguard economic stability, build resilience, and promote inclusive growth. The high level of debt is a source of vulnerability.

An International Monetary Fund (IMF) team, led by Mr. Justin Tyson, visited Praia from May 2 to 9, 2023 for discussions on the Cabo Verde economy for the 2023 Article IV Consultation and Second Review under the Extended Credit Facility (ECF) Arrangement, approved on June 15, 2022 (see Press Release No. 22/202). Subject to approval by IMF Management and the Executive Board in the coming weeks, the completion of the review under the ECF will make available SDR 4.50 million (about US$ 6.08 million), bringing the total IMF financial support under the arrangement to SDR 27.02 million (about US$36.26 million).

At the end of the mission, Mr. Tyson issued the following statement:

“Cabo Verde’s performance under the program is solid. The economy rebounded strongly in 2022 growing 17.7 percent, the primary deficit narrowed to 1.9 percent of GDP, the debt-to-GDP ratio declined, the current account improved, and international reserves were adequate to protect the currency peg. The authorities used monetary and fiscal policy to support the recovery and cushion the impact of the crisis on the most vulnerable.

“Real GDP growth is projected to moderate to 4.4 percent in 2023 as export growth normalizes. Inflation is projected at 5.2 percent in 2023, as fuel and food prices decline. The current account deficit is expected to widen in 2023 as exports of goods and services, tourism, remittances, and foreign direct investment slowdown from levels recorded in 2022.

“The 2023 budget appears on track and is aligned with the ECF-supported program. The Banco de Cabo Verde (BCV) has started to tighten monetary policy settings to narrow the interest rate differential with the European Central Bank (ECB) and protect the peg.

“The outlook is uncertain. Downside risks could emanate from weakened external demand in Cabo Verde’s major tourism markets that could impact growth. Further increases in fuel and food prices could increase the number of households that would require support from safety net programs, increasing expenditure. Fiscal risks could also stem from the failure to advance State-Owned Enterprise reforms or reduced fiscal efforts.

“Cabo Verde is highly susceptible to the effects of climate change, as evidenced by the recent four-year drought.  The government is rightly focusing on implementation of climate adaptation and mitigation measures in their most recent 5-year development strategy (PEDS II). The authorities are balancing the need for fiscal consolidation to reduce debt levels with capital spending to accelerate investments in climate action and are seeking support from partners (including the Fund) to access financing.

“Despite the challenging global economic environment, Cabo Verde continues to make good progress in its objective to protect vulnerable groups and foster higher and inclusive growth.

“The mission met with Vice Prime Minister and Minister of Finance and Business Development Olavo Correia, Central Bank Governor Oscar Santos, Minister of Family, Inclusion and Social Development Fernando Freire, members of the Economic and Finance Committee of the National Assembly, other government and central bank officials, representatives of the private sector, and development partners. The team would like to thank the authorities and other interlocutors for the frank and constructive discussions in the first in-person Article IV consultation since the end of the pandemic, as well as for excellent logistical support.”