IMF Executive Board Completes the Second Review Under the Policy Coordination Instrument for Cabo Verde

Washington: The Executive Board of the International Monetary Fund (IMF) completed the second review under the Policy Coordination Instrument (PCI) [1] for Cabo Verde today.

Cabo Verde has benefited from the PCI since July 15, 2019 ( Press Release No. 19/278 ). The program aims to support the authorities’ reform agenda under their Strategic Plan for Sustainable Development. The main objectives under the PCI are: (i) restoring fiscal and debt sustainability; (ii) restructuring State-Owned Enterprises (SOEs); (iii) enhancing the monetary policy framework and continuing to build reserves; (iv) fostering the financial system stability; and (v) advancing growth-enhancing structural reforms.

The COVID-19 pandemic continues to severely affect Cabo Verde’s economy, interrupting several years of strong and positive macroeconomic developments. Economic growth is projected at -6.8 percent (5.7 percent in 2019), mainly due to the collapse in tourism and transport activities, and a sharp contraction in other sectors. A recovery is expected in 2021 with real GDP growth at 4.5 percent. However, there are substantial risks to this outlook because of uncertainties about the duration of the pandemic and the expected recovery in the global economy and tourism flows.

Measures taken by the authorities since the onset of COVID-19 have been appropriately designed and well-targeted. They were aimed at enhancing the healthcare system, containing the community spread of the disease, protecting the most vulnerable, providing liquidity to the banking system, easing access to credit, and facilitating the payment of tax obligations.

Policies and reforms implementation during this difficult period have been supportive of macroeconomic stability. Hence, performance under the PCI has remained positive. All quantitative targets at end-March 2020 were met, except for the target on tax revenue which was narrowly missed because of the economic impact of COVID-19; and all reform targets were observed at end-June, except for the streamlining of tax exemptions that was partially met.

The authorities have reaffirmed commitment to medium-term objectives under the PCI, which expires in January 2021. Consequently, they agreed with staff that policies and reforms post-pandemic should focus on supporting economic recovery, enhancing revenue mobilization, containing non-priority spending as well as fiscal risks, particularly from SOEs, and continuing to rely on concessional borrowing.

Following the Executive Board’s discussion, Mr. Zhang, Deputy Managing Director and Acting Chair, issued the following statement:

“The Cabo Verdean economy is facing considerable challenges stemming from the impact of the COVID-19 pandemic. The sharp contraction in travel and tourism flows, lower external demand, and domestic containment measures have dealt a significant blow to the economy. The near-term outlook is highly uncertain, and there are significant downside risks. Notwithstanding the difficult circumstances, the authorities have maintained fiscal discipline and reform implementation efforts. As a result, performance under the Policy Coordination Instrument has remained strong.

“The authorities have taken swift and appropriate measures to address the economic and social impact of the pandemic. They have increased testing capacity, enhanced health care services, expanded social protection programs, and implemented policy measures to support the corporate sector. The authorities have also taken actions to execute COVID-related spending in a transparent manner.

“The shock related to COVID-19 has significantly eroded progress made by the authorities in recent years to place public debt on a sustained downward trajectory. With Cabo Verde at high risk of debt distress, it would be important to refocus on the achievement of medium-term fiscal and debt sustainability through fiscal consolidation and continued prudent borrowing policies, relying on highly concessional loans, as the health crisis abates.

“Progress in reforms aimed at increasing efficiency in the public enterprises sector, deepening financial intermediation, and improving the business environment remains critical to support economic recovery and enhance medium-term growth prospects. The authorities should continue to focus on completing ongoing reforms in these key areas as the health crisis situation improves.”