The FINANCIAL — On November 18, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation with Cabo Verde.
In 2015, economic growth stagnated at 1.5 percent, slightly below the 1.9 percent registered in 2014. Tourism recovered and remittances remained robust, but FDI and public investment slowed. The unemployment rate declined to 12.4 percent, as did youth unemployment, which nevertheless remained high at 28.6 percent. Consumer price inflation remained muted owing to lower food and energy prices, averaging 0.1 percent for 2015. On the external front, the current account deficit shrank markedly to an estimated 4.25 percent of GDP, reflecting lower imports due to the slowdown in public and foreign direct investment, the recovery in tourism and continued strong remittances. International reserves increased to about 5.75 months of prospective imports. In the first half of 2016, tourism continued its strong growth and FDI accelerated, reflecting a large increase in the pipeline of projects, according to IMF.
In the absence of imminent pressures on the balance of payments or consumer prices and to support the economic recovery, the Banco de Cabo Verde (BCV) reduced its policy rate by 25 basis points to 3.5 percent in February 2015, and lowered the minimum reserve requirement ratio from 18 to 15 percent. Lending rates have so far been slow to respond, reflecting the corporate debt overhang, and banks’ risk aversion. Asset quality and bank profitability remain a concern, but capital buffers appear adequate, and non-performing loans (NPLs) have continued to decline from their August 2014 peak of 22.4 percent, reaching 16.9 percent in June 2016.
With the authorities embarking on fiscal consolidation, the fiscal deficit fell to 4.1 percent of GDP in 2015, about 3.4 percentage points less than the year before, on account of a strong revenue performance. Total financing needs (including onlending to state-owned enterprises) also declined by 2.3 percentage points to 8.3 percent of GDP as the investment program was lowered to slow the buildup of public debt. Total public debt reached an estimated 125.8 percent of GDP by end-2015, reflecting the scaling up of externally financed public investment since 2008 coupled with low growth, falling prices and the recent strong appreciation of the U.S. dollar.
In 2016, growth is forecast to recover to 3.2 percent supported by FDI, domestic demand, agriculture, and tourism, which should benefit from the mild upswing in Europe. Domestically, consumer and investor confidence has started to recover, supported by continued strong remittances and the accommodative monetary policy stance. Inflation is expected to remain benign. The current account deficit should widen in 2016 reflecting strong FDI inflows and related imports, while the large-scale public investment program is gradually phased out over the medium term.
Executive Board Assessment
Executive Directors commended the authorities’ macroeconomic management amid the difficult external environment of recent years due to spillovers from the global financial and euro area crises. Directors welcomed Cabo Verde’s long‑term economic and social progress and that the economy appears to be at the onset of a recovery with prospects for a marked acceleration of growth in 2016. At the same time, Directors noted that the country is vulnerable to external shocks, and that its public debt, while mainly on concessional terms, is high. They encouraged fiscal consolidation to rebuild buffers, as well as structural reforms to promote the private sector as the main engine of growth, bolster productivity, and facilitate long‑term growth.
Directors welcomed the fiscal consolidation achieved in 2015 and the authorities’ plans to restrain spending in 2016 and beyond. They recommended safeguarding critical social spending and prioritizing strategic public investment projects while enhancing their efficiency. Directors saw merit in efforts to bolster domestic revenue mobilization, and noted the role of Fund technical assistance in supporting reforms in this area. They welcomed continued efforts to improve the efficiency of state‑owned enterprises and noted that acceleration of the privatization program would help bolster private sector growth. Directors emphasized that the financial difficulties of two state‑owned enterprises require swift resolution and welcomed the authorities’ determination in that regard.
Directors agreed that the recent loosening of monetary policy and continued accommodative stance is appropriate, given the slow private sector credit growth and provided there are no pressures on international reserves or prices. However, Directors encouraged the authorities to continue strengthening their liquidity management capacity to strengthen the monetary transmission mechanism and thus the effectiveness of monetary policy, improve interbank market efficiency, and continue developing the government securities market.
Directors supported continued efforts to safeguard financial stability and address non‑performing loans, including new regulations that facilitate their recognition and heightened bank supervision. They welcomed the progress in following up on the recommendations of the 2009 Financial Sector Assessment Program and encouraged the authorities to implement the remaining recommendations.
Directors emphasized the importance of stepping up the structural reform agenda to enhance the economy’s resilience to external shocks and diversify its sources of growth. They called for further progress on reforms to bolster competitiveness, including improving the business climate, increasing labor market efficiency, and supporting education and vocational training to reduce skill mismatches.