A newly-approved eighteen-month Policy Coordination Instrument will build on Cabo Verde's reform program under the Strategic Plan for Sustainable Development; It aims to bolster macroeconomic stability and encourage structural reforms; Cabo Verde's macroeconomic situation has improved significantly in recent years and the medium-term outlook is positive.
On July 15, 2019, the Executive Board of the International Monetary Fund (IMF) approved a new Eighteen-MonthPolicy Coordination Instrument(PCI) 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.
The newly-approved PCI will build on the authorities' reform program under the Strategic Plan for Sustainable Development (PEDS). It aims at bolstering macroeconomic stability through fiscal consolidation and growth-enhancing reforms to support medium-term fiscal and debt sustainability. The fiscal program will be anchored by improvement in the primary balance and the elimination, over time, of support from the budget to loss-making SOEs as reforms in the sector advance. Program reviews will take place on a semi-annual fixed schedule. While the PCI does not involve the use of IMF financial resources, successful completion of program reviews will help signal Cabo Verde's commitment to continued strong macroeconomic policies and structural reforms that are needed to address the country's economic challenges.
Following the Executive Board's discussion on Cabo Verde, Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, issued the following statement:
Economic recovery has gained momentum in the last three years with output growth rising from 1 percent in 2015 to above 5 percent in 2018, supported by industry and services sectors, as well as strong domestic demand. Inflation has been subdued despite a spike in 2018 due to higher food and fuel prices. The external current account deficit narrowed in 2018, mostly reflecting strong export performance and higher remittances.
Revenue-enhancing measures and expenditure controls have helped put public finances on a stronger footing and reduce the public debt-to-GDP ratio in the last three years. These efforts need to be sustained to support medium-term fiscal and debt sustainability. In this context, decisive progress in public enterprise reform is needed.
The risk of external and overall debt distress is assessed as high, calling for continued fiscal consolidation, reliance on concessional borrowing, and decisive progress in growth-enhancing reforms.
The monetary policy stance is appropriate and consistent with the objective of protecting the exchange rate peg and price stability. The recent decision by the Banco de Cabo Verde (BCV) to reduce the overnight interest rate corridor is expected to improve the monetary policy transmission mechanism. The BCV should continue these efforts, notably by increasing communication on its policy direction. It should also continue strengthening banking supervision and take appropriate actions for a continued reduction in non-performing loans.
The new PCI will support the authorities' efforts to enhance macroeconomic stability as they implement their Strategic Plan for Sustainable Development (PEDS). Reforms and quantitative targets under the PCI focus on strengthening fiscal and debt sustainability, enhancing the monetary policy framework, fostering the financial system stability, and increasing inclusive growth.''
Source: International Monetary Fund (IMF).