Washington, DC: On June 15, 2022, the Executive Board of the International Monetary Fund (IMF) approved a 36-month arrangement under the Extended Credit Facility (ECF) for Cabo Verde in an amount equivalent to SDR 45.03 million (190 percent of quota or about US$60 million). The ECF arrangement will help shore up international reserves, preserve debt sustainability, increase resilience to shocks, including from climate change, and make growth more inclusive. The program will help fill financing gaps together with the support of continued financing from Cabo Verde’s development partners.
Approval of the ECF arrangement enables immediate disbursement of SDR11.26 million (47.5 percent of quota, about US$15 million), fully usable for budget financing, in order to support the implementation of the reforms. This follows Fund emergency support to Cabo Verde in April 2020 under the Rapid Credit Facility (100 percent of quota, SDR 23.7 million, equivalent to US$32.3 million at the time of approval).
Cabo Verde’s economy is facing significant challenges associated with the lingering effects of the global pandemic, as well as rising food and fuel prices due to the war in Ukraine and the impact of the ongoing five-year drought. The economy rebounded strongly in 2021 following the COVID-19 induced sharp recession in 2020 (about 15 percent contraction), and recorded growth of 7 percent, which was supported by the easing of international travel restrictions, and the country’s highly successful vaccination program (one of the most successful in Africa). However, the spillover effects of the war in Ukraine are expected to weaken the economic recovery and the growth forecast has been revised downward from 6 percent to 4 percent in 2022. Higher commodity prices and weaker than earlier expected prospects for the tourism sector are projected to result in a significant widening of the current account deficit to about 14.1 percent of GDP in 2022, as well as lower international reserves. The overall fiscal deficit is expected to continue to improve to 6.3 percent of GDP in 2022, from 7.3 percent of GDP in 2021.
The ECF arrangement has four main objectives that are aligned with the government’s medium-term economic development plan (PEDS). First, strengthening public finances to preserve public debt sustainability and expand social safety nets. Second, reducing fiscal risks from public enterprises and improving their financial management and transparency. Third, modernizing the monetary policy framework and improving the resilience of the financial system. Fourth, raising growth potential and building resilience to shocks through structural reforms and economic diversification.
At the conclusion of the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, made the following statement:
“Cabo Verde showed a strong track record of commitment to reforms and macroeconomic stability before and during the pandemic, which contributed to a strong rebound of the economy following the COVID-19 induced recession. However, the spillover effects of the war in Ukraine, the lingering effects of the pandemic, and the impact of the ongoing five-year drought have weakened economic recovery and resulted in increasing financing needs.
“The new Fund-supported arrangement will support the authorities’ priorities to preserve debt sustainability, shore up international reserves, increase resilience to shocks, including from climate change, and make growth more inclusive. The reform agenda will be supported by a well-tailored capacity development strategy which is aligned with the program.
“The key strategy focuses on gradual and growth-friendly fiscal consolidation to place public debt on a decisive downward path and maintain debt sustainability. Fiscal policy will also be guided by the need to increase social spending to protect vulnerable groups. Implementing fiscal structural reforms, including strengthening the tax administration, enhancing public financial management, and reforming state-owned enterprises, will help boost revenue, enhance the efficiency of public spending, and reduce fiscal risks. The authorities’ initiatives to further enhance fiscal transparency and governance should continue.
“Modernizing the monetary framework and strengthening the financial sector will help safeguard financial stability and the peg. Bolstering international reserves, carefully unwinding crisis-related support measures, closely monitoring non-performing loans, and further strengthening the AML/CFT framework, will be critical measures in this regard.
“Steadfastly implementing the authorities’ development plan will improve the business environment and help support private sector-led growth. Considering Cabo Verde’s high vulnerability to the effects of climate change, the planned bold steps to climate adaptation will be key to boost the economy’s resilience and growth potential.”
Cabo Verde: Selected Economic Indicators, 2019-27
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