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IMF approves policy coordination instrument with the Republic of Cabo Verde

The new PCI will support the authorities’ efforts to enhance macroeconomic stability as they implement their Strategic Plan for Sustainable Development (PEDS). (Image source: Ulrika/Flickr)

The International Monetary Fund (IMF) has approved an 18-month policy coordination instrument (PCI) with the Republic of Cabo Verde to bolster macroeconomic reforms to support medium-term fiscal and debt sustainability

The fiscal programme will be anchored by improvement in the primary balance and the elimination, over time, of support from the budget to loss-making SOEs as reforms in the sector advance. Programme reviews will take place on a semi-annual fixed schedule.

While the PCI does not involve the use of IMF financial resources, successful completion of programme reviews will help signal the Republic of Cabo Verde’s commitment to continued strong macroeconomic policies and structural reforms that are needed to address the country’s economic challenges.

Stable macroeconomic situation in the Republic of Cabo Verde

The Republic of Cabo Verde’s macroeconomic situation has improved significantly in recent years and the outlook is positive despite downside risks. Economic growth has been robust and is projected at five per cent for 2019, while inflation is expected to remain low. The fiscal deficit has declined from 4.6 per cent of GDP in 2015 to 2.8 per cent of GDP in 2018 and is projected at 2.2 per cent of GDP for 2019.

Fiscal risks generated by loss-making State-Owned Enterprises (SOEs) are expected to subside, reflecting the impact of reforms put in place in 2018 and early 2019, notably the privatisation of the national airline company, as well as additional SOEs restructuring measures planned for 2019-20. The external position is projected to strengthen further, with gross international reserves remaining above five months of prospective imports of goods and services. The Republic of Cabo Verde’s risk of external and overall debt distress is assessed as high, unchanged compared with the 2018 Debt Sustainability Analysis carried out by the staffs of the IMF and the World Bank.

Mitsuhiro Furusawa, deputy managing director and acting chair, IMF, said, “Economic recovery has gained momentum in the last three years with output growth rising from one per cent in 2015 to above five per cent per cent in 2018, supported by industry and services sectors, as well as strong domestic demand. Inflation has been subdued despite a spike in 2018 due to higher food and fuel prices. The external current account deficit narrowed in 2018, mostly reflecting strong export performance and higher remittances.”

“Revenue-enhancing measures and expenditure controls have helped put public finances on a stronger footing and reduce the public debt-to-GDP ratio in the last three years. These efforts need to be sustained to support medium-term fiscal and debt sustainability. In this context, decisive progress in public enterprise reform is needed.”

“The monetary policy stance is appropriate and consistent with the objective of protecting the exchange rate peg and price stability. The recent decision by the Banco de Cabo Verde (BCV) to reduce the overnight interest rate corridor is expected to improve the monetary policy transmission mechanism. The BCV should continue these efforts, notably by increasing communication in its policy direction. It should also continue strengthening banking supervision and take appropriate actions for a continued reduction in non-performing loans,” Furusawa added.

“The new PCI will support the authorities’ efforts to enhance macroeconomic stability as they implement their Strategic Plan for Sustainable Development (PEDS). Reforms and quantitative targets under the PCI focus on strengthening fiscal and debt sustainability, enhancing the monetary policy framework, fostering the financial system stability, and increasing inclusive growth,” Furusawa concluded.

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