Fiscal consolidation efforts should continue to preserve gains made in recent years in strengthening public finances, and to support medium-term debt sustainability; continued progress in State-owned enterprises reforms is critical to reduce fiscal risks, support medium-term debt sustainability and economic growth. In this context, the recent privatization of the national airline (TACV) is a positive development; the improvement in financial sector indicators is welcome. However, banking supervision should continue to be strengthened and a resolution for the high level of legacy non-performing loans is an important priority.
An International Monetary Fund (IMF) staff team led by Malangu Kabedi-Mbuyi visited Praia during March 10-25, 2019. The team’s discussions focused on the 2019 Article IV consultation and on the authorities’ policy initiatives and reforms for the medium term that could be supported by the IMF. Further discussions on these reforms will take place in Washington D.C. in the coming weeks.
At the end of the visit, Mrs. Kabedi-Mbuyi issued the following statement:
“The recent momentum in economic growth continues. After an average growth of about 1 percent during 2009–15, real gross domestic product (GDP) expanded by 4 percent in 2017, and by an estimated 4.7 percent in 2018, reflecting robust activity in the industry, fishery, commerce and tourism sectors. For 2019 and the medium term, real GDP growth is forecasted in the range of 4.8 to 5 percent. The abovementioned factors will remain important contributors to real GDP. However, enhancing growth prospects to reach 5 percent will require sustained implementation of wide-reaching reforms to address long-standing impediments to growth, improve the business environment and attract foreign direct investment. In this context, the recent privatization of the national airline company (TACV) is welcome.
“Cabo Verde’s external position strengthened in 2018 with the current account deficit narrowing to 4.5 percent of GDP (6.6 percent of GDP in 2017) owing to strong export performance, increased remittances, and deceleration in imports demand. The signing of an agreement between Cabo Verde and the European Union for fish exports is a welcome development in this context. Gross international reserves increased and reached 5.1 months of prospective imports at end-December 2018.
“In the fiscal area, the overall deficit narrowed, mostly because of strong revenue performance, consistent with sustained economic activity and implementation of revenue administration measures. The overall deficit declined from 3 percent of GDP in 2017 to an estimated 2.8 percent of GDP in 2018. However, financing needs rose from 3.4 percent of GDP to 3.9 percent of GDP as budget support to financially-strained State-owned enterprises (SOEs) increased. For 2019, current projections show that the budgeted deficit of 3 percent of GDP is achievable through an effective implementation of revenue measures contemplated in the budget and expenditure restraint. The stock of public debt is estimated at 125 percent of GDP at end-December 2018, down from 127 percent in 2017.
“Going forward, further improvement in the fiscal position is needed to increase fiscal space for capital expenditure, build fiscal buffers and reduce the risk of debt distress over the medium term. This will require sustained implementation of reforms to broaden the tax base, increase efficiency in tax administration, improve tax compliance, strengthen capital expenditure management, and maintain a tight control on current expenditure. Further progress in SOEs reforms is also critical for medium-term fiscal and debt sustainability objectives.
“The monetary policy stance appears appropriate given low inflationary pressures and the level of international reserves. However, continued caution is needed. The central bank (BCV) needs to continue monitoring developments in the Euro area closely and stand ready to change the monetary policy stance as needed; and should continue to maintain a high level of reserves to protect the peg and increase the economy’s resilience to adverse shocks. To enhance the efficiency of monetary policy, further actions are needed to strengthen the monetary policy transmission mechanism.
“The BCV’s continued efforts to strengthen banking sector supervision are welcome. In 2018, financial stability indicators improved, and banks’ profitability increased. Although non-performing loans (NPLs) declined in 2018, their high level (12.2 percent of total loans at end-December 2018) remains a source of concern, and resolution of legacy loans linked to the 2008 financial crisis should be an important priority.
“Sustained progress in the implementation of structural reforms is critical to enhance prospects for inclusive growth. In this context, priority should be given to completing the reform agenda for SOEs. Progress in these reforms will eliminate the drain of budgetary resources by SOEs facing financial difficulties, and put public debt on a sustained downward trend, thus helping reduce the risk of debt distress over the medium term. Other priority areas include reforms aimed at improving the quality of education, supporting vocational training, and increasing financial literacy for micro as well as small-and-medium sized enterprises, and other measures to improve financial inclusion.
“The team met with Prime Minister Ulisses Correia e Silva, Deputy Prime Minister and Minister of Finance Olavo Correia, Minister of Industry, Trade and Energy Alexandre Dias Monteiro, the Minister of Agriculture and Environment Gilberto Silva, the Central Bank Governor João Serra, the President of the Municipality of the Island of Sal Julio Lopes and other government and State-owned enterprises’ senior officials. The team also met with representatives of labor unions, non-government organizations, development partners, and the private sector. The team thanks the authorities for their hospitality and collaboration.”
The IMF Executive Board is expected to discuss the 2019 Article IV consultation report in June 2019.Distributed by APO Group on behalf of International Monetary Fund (IMF).