- The IMF Executive Board completed the fifth review of the 36-month arrangement under the Extended Credit Facility (ECF) with Cabo Verde, and the second review of the 18-month arrangement under the Resilience and Sustainability Facility (RSF).
- The ECF-supported program aims to strengthen public finances and put debt on a downward path, reduce fiscal risks from public enterprises, modernize the monetary policy framework, and raise growth potential. The RSF supports government efforts to implement macro-critical climate reforms and catalyze private climate finance.
- All ECF performance criteria were met except the gross international reserves (GIR) quantitative performance criteria (QPC), although the Bank of Cabo Verde has taken corrective actions to address the missed target. All indicative targets (IT), except for GIR, and structural benchmarks (SBs) through September 2024 were met. One RSF reform measure (RM) was completed, with three delayed to the next review.
Washington, DC — January 17, 2025: The Executive Board of the IMF completed the fifth review of Cabo Verde's performance under the 36-month ECF arrangement that was approved on June 15, 2022, and the second review of the 18-month RSF arrangement that was approved on December 11, 2023. The completion of the fifth ECF review allows the authorities to draw the equivalent of SDR 4.5 million (approximately US$ 5.87 million), while completion of the second RSF review will allow disbursement of SDR 2.632 million (approximately US$ 3.43 million).
In completing the fifth review under the ECF arrangement, the Executive Board approved the authorities' request for modification of the end-September and end-December 2024 performance criteria. The Executive Board supported the delayed implementation of three RMs under the RSF arrangement.
Cabo Verde continues to grow strongly, reflecting a rebound in tourism, robust export performance, as well as private consumption growth. The authorities have been successful in maintaining macro-financial stability. Real GDP growth is projected at 6 percent in 2024 with low inflation, a small current account deficit, and an adequate level of international reserves to protect the peg. The public debt-to-GDP ratio continues a downward path, reflecting continued high growth and an improved primary balance.
Performance under the ECF continues to be strong. All QPCs for end-June 2024 were met along with the continuous PCs, except for the QPC on GIR. GIR still cover the minimum 5-months of imports target followed by Banco de Cabo Verde (BCV), and the BCV has embarked on corrective actions with two policy rate increases of a cumulative 75 basis points in November and December 2024 and forward guidance to indicate the intent of closing the differential with the ECB policy rate. All ITs to September 2024 were met, except for the one on GIR. One SB due end-June 2024 and two SBs due end-September 2024 were met, while the SB due end-July 2024 was implemented with a short-delay in September. Under the RSF, one RM was completed at end-November 2024, while three are delayed to the next review.
Cabo Verde's near-term economic outlook remains favorable. Growth is projected to gradually converge to its potential rate of about 4.8 percent by 2029. Inflation is forecast at 2 percent over the medium-term, broadly in line with euro area inflation. The current account deficit is estimated to have narrowed in 2024 and then stabilize at around 2.5 percent over the medium-term. Debt is projected to continue declining as the primary balance moves to a surplus in 2025 and thereafter improves to over 1 percent of GDP.
The macroeconomic outlook is subject to downside risks, as Cabo Verde is vulnerable to external and internal shocks. Downside risks could emanate from weakened demand in major tourism markets and external price shocks. The effects of climate change—droughts, sea level rise, and natural disasters could affect the country's long-term outlook via damage to coastal infrastructure and tourism. State-Owned Enterprise (SOE) reforms remain critical to improve financial performance and reduce fiscal and financial sector risks. The country's high level of debt is a source of vulnerability, and concessional financing to limit debt servicing cost remains important. On the upside, stronger tourism growth could lead to higher overall economic activity.
Following the Executive Board discussion on Cabo Verde, Acting Chair and Deputy Managing Director Bo Li issued the following statement:
"Economic activity in Cabo Verde was strong in 2024, and the near-term outlook is favorable. Inflation was low and is expected to remain at moderate levels in the medium term. Downside risks to the outlook include potential lower external demand from major tourism sources, fiscal risks should state-owned enterprise reforms stall, and climate change shocks.
"Program performance under the extended credit facility arrangement was generally strong. All performance criteria were met, except the target on gross international reserves, but the authorities have taken appropriate corrective actions. All program-supported structural reforms were also met, although one with a short delay. Progress under the resilience and sustainability facility (RSF) arrangement is steady. While it has been slower than foreseen, this reflects the complexity and interconnectedness of the reform measures.
"The fiscal position is estimated to have been tighter than budgeted in 2024, and the debt-to-GDP ratio continues to decline. Over the medium term, domestic revenue mobilization and steadfast progress on fiscal structural reforms are needed, while protecting social spending and enhancing public investment execution. Steady progress on the reform of state-owned enterprises remains critical for limiting fiscal risks and improving services.
"The monetary policy framework is focused on safeguarding the exchange rate peg. The Central Bank of Cabo Verde should continue to tighten rates to reduce the interest rate differential with the European Central Bank's policy rate and protect external buffers. The financial sector remains stable, capitalized, profitable, and liquid, albeit with rising non-performing loans, which requires close monitoring.
"The authorities should continue implementing their ambitious structural reform agenda. This includes, in particular, the implementation of the reform measures under the RSF arrangement to help catalyze broader financial and technical support for building climate resilience."
