Cabo Verde

  • After experiencing low growth due to the impact of the European and global financial crises, the economy recovered in 2016 to 3.2% and is expected to continue along the same trajectory in 2017 and 2018, with GDP growth rates of 3.7% and 4.1%, respectively.
  • Cabo Verde is at a crossroads: following five years of counter-cyclical fiscal policy to offset a low-growth period and rapid debt accumulation, a paradigm change is now required to make the private sector the growth engine.
  • Well-coordinated sector-based policies, an improved business environment and a focus on regional integration are required to remove current binding constraints to industrialization such as limited market access, high energy costs and a lack of inter island transportation.

Real GDP growth in the country has been sluggish over the past years. Between 2000 and 2008, the country recorded an average growth rate of 6.6% before hitting a recession in 2009 on the back of the European crisis. Thereafter, in spite of a counter-cyclical policy with high investment spending, Cabo Verde only managed to grow by an average of 1.3% over the 2010-15 period. As a consequence of high investment spending, the debt level increased drastically, from 71.9% of GDP in 2010 to 125.9% in 2015. In 2016, however, the economy showed some positive signs of recovery. Albeit still at overall low levels, credit to the private sector increased by 2.1% in the first eight months of 2016. Similarly, a trend inversion was noted in economic confidence indicators.

On the fiscal side, after having presented an expansionary fiscal stance, the new government revised its plans to settle for a deficit of 3.3% of GDP, 1.9 percentage points below what was initially approved. GDP growth in 2016 reached an estimated 3.2%, against 1.5% in 2015. For 2017 and 2018, growth should reach 3.7% and 4.1% respectively, driven by continued increase in confidence, strength in agricultural output and tourism, as well as government efforts to stay on the reform path. On the policy front, Cabo Verde’s main issues in 2016 are likely to carry over to 2017 and 2018. They include control of the country’s fiscal stance, and in particular, the drain on the budget of some state-owned enterprises (SOEs). Considering that Cabo Verde is importing monetary policy through its euro peg, it only has fiscal policy to face any shocks. However, with public debt at 125.9% of GDP (excluding contingent liabilities) and rising, there is little room for man oeuvre. For 2017 and 2018, the Medium-Term Expenditure Framework (MTEF) should ensure some built-in flexibility to weather potential shocks. On the debt side, while underlying sustainability indicators are under IMF thresholds, it is important to take urgent action to stem the debt generating process.

Considering the debt level, the government is seeking to change the underlying growth paradigm in the country, which has up to now been based to a large extent on the public sector. This requires enforcing a credible and far-reaching engagement to further improve the business environment, with efforts to promote industrialization and entrepreneurship. However, further improving the business environment depends on removing – through well-coordinated sector based policies – current binding constraints such as limited market access, high-energy costs and a lack of inter-island transportation.