Economic Analysis
Cape Verde

Cape Verde

Population 0.5 miilion
GDP per capita 3,301 US$
B
Country risk assessment
C
Business Climate
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 4.7 4.0 4.2 4.0
Inflation (yearly average, %) -1.4 0.8 1.0 1.6
Budget balance (% GDP) -3.1 -3.0 -2.1 -1.9
Current account balance (% GDP) -2.4 -6.2 -9.1 -10.0
Public debt (% GDP) 127.6 125.8 129.9 130.5

 

(e): Estimate. (f): Forecast.

STRENGTHS

 

  • Growth of tourist activity
  • Fishery reserves
  • Efficient banking and telecommunications services
  • Stable, independent political institutions
  • Exchange rate cooperation agreement with Portugal, guaranteeing convertibility and a fixed rate with the euro, and a credit facility

WEAKNESSES

 

  • Very high level of public debt
  • High unemployment (15%; 28.6% among young people)
  • Poor infrastructure quality; lack of maintenance
  • Food and energy wholly imported
  • Dependent on external shocks, international aid, the diaspora and tourism
  • Exposed to climate change, volcanic and earthquake events, and cyclones

Risk assessment

Comfortable growth linked to external demand

Cape Verdean growth is expected to stabilise at a comfortable level in 2019 thanks to a favourable external environment. Economic activity is mainly linked to the supply of services (73% of GDP in 2017), and more specifically to tourism activity, which is expected to continue amid strong demand from European countries. In addition to providing the country's main source of tourists, European countries are also Cabo Verde’s principal trading partners. The strength of tourism could spread to other sectors of the economy, especially industry (20% of GDP), where foreign investment looks set to increase (construction of new hotels), providing a channel for construction and creating jobs. Conversely, public investment is expected to remain weak due to the restrictive fiscal policy still in place, which could have negative effects on growth, but should be offset by rising domestic consumption thanks to better access to credit. Agriculture (10% of GDP), which contracted in 2018 due to a severe drought, could recover if weather conditions are favourable. Inflation is expected to slightly accelerate in line with rising energy and food prices, but should remain under control.

Continuation of the fiscal consolidation required by the exchange cooperation agreement with Portugal

Controlling debt sustainability, particularly its external share (75%), remains the government's priority and justifies continuation of the restrictive fiscal policy. Fiscal consolidation will take the form of a reduction and improvement in the allocation of expenditure. With this in mind, the government plans to reform the management of state-owned enterprises, particularly the three making the heaviest losses: TACV (airline), IFH (real estate) and Electra (water and electricity). This will lead to some operations being reassigned to other more efficient state-owned enterprises, a renegotiation of debts to creditors to reduce them by half (TACV’s debts alone represent 6% of GDP), and, eventually, the privatisation of these companies. As a result, the budget deficit is expected to decline, and debt should stabilise while remaining at a high level. Nevertheless, the risk of default remains under control, with much of the debt in the form of concessional loans from international organisations and long-term loans. Interest payments on the debt represented 3% of GDP in 2017.

Regarding the external accounts, the current account deficit is expected to widen due to increased imports of capital goods, driven by the start and continuation of construction projects, while fish and shellfish exports are expected to remain stable. The increase in the services surplus (17% of GDP in 2017), thanks to the growth in tourism, and the surplus in the balance of transfers (15% of GDP) will not offset the trade deficit (37% of GDP). Increased FDI (6% of GDP in 2017) from European countries will likely finance the current account deficit.

In the absence of pressure on prices and the exchange rate, the monetary authorities plan to maintain an accommodative policy and, with comfortable foreign exchange reserves (six months of imports in 2017), will manage to maintain the fixed rate between the euro and the national currency.

Structural reforms to foster sustainable and inclusive growth

Cabo Verde is an established democracy. The country is among the top-ranked countries in sub-Saharan Africa according to World Bank governance indicators, particularly in the fight against corruption (44th out of 214 countries).

The Movimiento para a Democracia (MDP) won the March 2016 parliamentary elections, and its candidate, Jorge Carlos Fonseca, was re-elected as leader of the country for a second term in the first round of the presidential elections on October 2, 2016. Aware of the country's exposure to exogenous shocks, inequality, poverty and unemployment, the government aims to implement structural reforms in line with the Strategic Plan for Sustainable Development (2017/21) to foster more sustainable and inclusive growth. The programme's objectives include transforming the country into a hub for air and maritime transport, improving access to basic public services (health, education, housing, water and electricity), making the labour market more flexible and conducting administrative reforms that promote transparency. The country has one of the best business climates in sub-Saharan Africa, but still suffers from inadequate infrastructure, particularly electrical, and a lack of insolvency regulations, resulting in a drop of two places in the World Bank's Doing Business ranking (131 out of 190 countries).

With regard to its foreign policy, the country will continue to maintain its ties with China, whose investment in the country is constantly increasing and is expected to be concentrated in the tourism sector, infrastructure and the construction of a special economic zone. The Africa-China Development Fund is the main tool being used to take this cooperation forward.

 

Last update: February 2019

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