With IMF support Cape Verde aims to build climate resilience, grow strongly
Washington, DC, US (PANA) - The Executive Board of the International Monetary Fund (IMF) has completed the fifth review of Cape Verde’s performance under the 36-month ECF arrangement that was approved on 15 June, 2022, and the second review of the 18-month RSF arrangement that was approved on authorities to draw US$ 5.87 million, while completion of the second RSF review will allow disbursement of 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-December 2024 performance criteria.
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.
The country’s real GDP growth is projected at 6 per cent 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.
The IMF Board noted that Cape Verde’s performance under the ECF continues to be strong. Its near-term economic outlook remains favourable.
Growth is projected to gradually converge to its potential rate of about 4.8 per cent by 2029. Inflation is forecast at 2 per cent 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 per cent 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 per cent 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 Cape Verde, Acting Chair and Deputy Managing Director Bo Li remarked: “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.
“Programme 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 programme-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.”
According to the IMF official, Cape Verde’s 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.
Mr. Li emphasized that 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.
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