The IMF Executive Board completed the third review under the 36-month Extended Credit Facility (ECF) arrangement with Cabo Verde, providing the country with access to SDR 4.5 million (about US$6 million), and approved an 18-month arrangement under the Resilience and Sustainability Facility (RSF), in the amount of 100 percent of quota (SDR 23.69 million, about US$31.45 million); Performance under the economic reform program is strong, and the authorities are taking steps to further strengthen the program. Post-Covid economic activity recovered as tourism returned to the islands; The RSF will support the government’s effort to implement macro-critical climate reforms and catalyze private finance for climate adaptation and transition.
The Executive Board of the International Monetary Fund (IMF) completed the Third Review of Cabo Verde’s performance under the 36-month Extended Credit Facility (ECF) arrangement that was approved on June 15, 2022, and approved the request for an 18-month arrangement under the Resilience and Sustainability Facility (RSF). The completion of the review allows the authorities to draw the equivalent of SDR 4.5 million (about US$6 million). The arrangement under the RSF is in the amount of 100 percent of quota (SDR 23.69 million, approximately US$31.45 million).
In completing the third review, the Executive Board approved the authorities’ request for modification of the end-December 2023 and end-June 2024 performance criteria.
Cabo Verde’s performance under the ECF is strong. The economy rebounded strongly in 2022 with real GDP growing 17.1 percent but is projected to moderate to 4.5 percent in 2023 as export growth normalizes. Inflation is projected at 3 percent by end 2023, as fuel and food prices decline. The current account deficit is expected to widen in 2023 as exports of goods and services, tourism and remittances grow more slowly than imports. The 2024 budget is aligned with the ECF-supported program. The Banco de Cabo Verde (BCV) tightened monetary policy further to narrow the interest rate differential with the European Central Bank (ECB) to protect the peg.
The RSF will support the government’s effort to implement macro-critical climate reforms and catalyze private finance for climate adaptation and transition. The program will support the authorities’ reform measures in five areas: (i) strengthening climate change policy governance; (ii) improving physical and fiscal resilience; (iii) strengthening mitigation and resilience through promoting energy efficiency and transition to renewables; (iv) promoting adaptation by ensuring ecological and economic sustainability of water resources and planning for long-run climate impacts; and (v) strengthening financial sector resilience to climate change.
The outlook is uncertain and subject to downside risks which could emanate from weakened demand in major tourism markets and external price shocks. Fiscal risks could also stem from the failure to advance State-Owned Enterprise (SOE) reforms or reduced fiscal consolidation efforts. The effects of climate change—a key medium-term risk—are evidenced in the recent years of drought. The country’s high risk of overall debt distress is a source of vulnerability and thus concessional financing to limit debt servicing cost is important. On the upside, stronger tourism growth could lead to higher overall economic activity.
Following the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, made the following statement:
“Economic activity has recovered rapidly in Cabo Verde post‑COVID and the near-term outlook is favorable despite downside risks. Inflation decelerated faster than anticipated at the time of the second review, despite the ripple effects from the war in Ukraine on food, fuel, and transportation costs. Risks to the outlook remain, including, from potential lower external demand from major tourism markets and climate change shocks.
Program performance and ownership has been strong. All performance criteria were met, and all program-supported structural reforms were also met.
Fiscal policy is anchored by an appropriate balance between fiscal consolidation to put debt on a downward path, while protecting the vulnerable and investing in key priority projects for future growth. The medium-term fiscal objectives are dependent on the progress in domestic revenue mobilization, streamlining tax exemptions, increasing the effectiveness of public investment projects, and improving debt management. Steady progress on SOE reforms remains critical for reducing fiscal risks and improving services.
The monetary policy appropriately remains focused on safeguarding the peg. The financial sector remains stable from a medium-term perspective. Banks’ profitability has been positive and NPLs maintained the downward trend since 2016. The authorities are advised to continue working with banks to facilitate resolution of NPLs. Measures to improve the autonomy, governance and accountability framework of the central bank and strengthen the AML/CFT framework and its effectiveness remain crucial.
The authorities are encouraged to continue with their ambitious structural reform agenda to adapt to the challenges posed by climate change, reduce the cost of doing business and accelerate public enterprise reforms. The Cabo Verdean authorities are encouraged to pursue their strong package of reforms measures under the RSF arrangement, and to leverage synergies with other official financing and catalyze further public and private financing for climate mitigation and adaptation efforts.”
Distributed by APO Group on behalf of International Monetary Fund (IMF).