The COVID-19 Pandemic Has Posed Unprecedented Challenges to Cabo Verde’s Economy and Exposed the Vulnerabilities of the Growth Model

PRAIA  – Economic activity in Cabo Verde is estimated to have contracted by 14.8% in 2020, the largest contraction on record and the second largest in Sub-Saharan Africa, according to Cabo Verde’s latest Economic Update published by the World Bank today.

The report highlights two main factors that contributed to this economic slowdown: the shutdown of the tourism sector for nine months and the associated negative spillovers in upstream sectors as well as the sharp contraction in private consumption as a result of strict domestic containment measures to prevent the spread of the COVID-19 virus.

Cabo Verde’s development model is characterized by an overreliance in tourism, large presence of the government in the economy, and big Foreign Direct Investment (FDI) flows directed to all-inclusive hotels with little connection to other sectors of the economy. The crisis reversed the progress in poverty reduction achieved since 2015, putting around 100,000 people into temporary poverty.

As a result of the dramatic reduction in tax revenues due to the COVID-19 crisis, both the fiscal deficit and the financing needs increased substantially in 2020. The already weak financial performance of the State Owned Enterprise (SOE) was hit hard by the crisis, requiring emergency fiscal support and exacerbating already high fiscal risks. Consequently, the recent gains in reducing the public debt burden were reversed in 2020.

“Advance revenue-enhancing fiscal reforms while protecting social expenditure and priority public investment could support the return to a prudent fiscal and debt stance in the aftermath of the COVID-19 crisis,” explained Daniel Reyes, World Bank Senior Economist in Cabo Verde and author of the report. “Continuing the carefully management of public debt is essential to ensure macro-economic stability over the medium term.”

Real GDP is expected to start recovering gradually in 2021, supported by a pick-up in tourism flows in the last quarter of the year, and reach an average growth rate of 5.1% between 2021 and 2023. However, the outlook is highly uncertain, with substantial downside risks. Uncertainties regarding the duration of the pandemic—including the rise of new variants of the virus—and the speed of global recovery, particularly in Europe, cloud medium-term prospects.

According to the report, Cabo Verde needs to promote fiscal and debt sustainability in the aftermath of the pandemic. To return to a prudent fiscal policy stance the country would benefit from pushing for reforms that increase revenue collection, prioritize health and capital spending, and restructure the management of fiscal risks.

To improve debt management and transparency it is necessary to continue implementing a zero limit on non-concessional borrowing, publish and improve the content of the quarterly bulletins of the State Business Sector, and extend the coverage of public debt.

In terms of structural policies, there is a need to resume the public enterprise reform agenda, bringing the private sector into the management of public services and thus improve efficiency and service delivery.

In parallel, laying the foundation for strengthening the role of the private sector will help to build a more sustainable and resilient economy. Creating a more transparent and predictable business environment would help tap into a large potential for new investments and higher productivity.

In this regard, the special section of this report analyses the enabling environment for the promotion of private investment, focusing on FDI, the domestic business environment and the level of competition.

The report highlights that to leverage FDI for inclusive economic growth, there is a need to promote linkages between domestic suppliers and hotel chains, particularly in the agriculture and fishery sectors. It also notes that to improve the business environment for domestic enterprises, notably SMEs, the country would benefit from simplifying rules and regulations for licenses and permits to facilitate firms’ entry into markets and level the playing field by ensuring a stable business environment. Finally, the report recommends to increase competition by updating the competition legal framework and promote its effective implementation.

“The recovery of the economy after the COVID-19 crisis is an opportunity to leverage the tourism sector to build a more resilient economy” said Eneida Fernandes, World Bank Resident Representative for Cabo Verde. “The implementation of key structural reforms to increase the productivity of domestic firms that could be connected to the Tourism sector will support a more sustainable and resilient recovery, maximizing its contribution to economic growth.”

 

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