Cabo Verde

Country Overview

Cabo Verde is an archipelago of 10 islands located off the west coast of Africa. The country has around 500,000 inhabitants and is located some 300 miles off the coast of Senegal. While ethnically heterogeneous and a country of immigrants, Cabo Verde is religiously and culturally homogenous.

Its location on the geographic band of the Sahel greatly influences its climate. Cabo Verde has few natural resources and suffers from serious water shortages. These have been exacerbated by cycles of long-term drought that have contributed to significant emigration throughout Cabo Verde’s history. It is believed that at least as many Cabo Verdeans live abroad as on the islands. The Diaspora maintains close relations with the country, sending home remittances equivalent to around 9 percent of GDP in recent years. 

With barely 10% of its surface as arable land and limited mineral resources, Cabo Verde’s arid conditions and mountainous terrain place the country at a disadvantage for agricultural production and it is a net importer of food and fuel. However, Cabo Verde’s tourism industry is developing and the government is making efforts to turn the islands into a trade and transport hub.

Political Context

Politics in Cabo Verde have been largely consensus-oriented, and majority rule and civil liberties have been widely respected. Since achieving independence Cabo Verde has not experienced a single coup, a regional record shared only by Senegal. Cabo Verde’s strong institutions are reflected by its score in the Polity IV index, which measures the strength of a country’s democratic framework. A Polity IV score of 0 denotes total autocracy, while a score of 10 indicates a high-functioning democracy. Cabo Verde is the only country in the region to score a 10. Since the introduction of multiparty democracy in the 1990s Cabo Verde’s political and social institutions have rapidly and continuously strengthened. The integrity of its institutions is unmatched in West Africa and also surpasses other former Portuguese colonies (Angola’s Polity IV score is 2 and Mozambique’s is 5). Cabo Verde’s Polity IV score is higher than South Africa’s (9) and draws even with African star performer Mauritius (10). Cabo Verde currently ranks second in the Country Policy and Institutional Assessment (CPIA) for all International Development Association (IDA) countries, and is first among Sub-Saharan African (SSA) countries.

The two most recent rounds of national elections, both held in 2011, brought about a novel arrangement in Cabo Verdean politics. For the first time, the President and Prime Minister represent different parties: the Movement for Democracy (MpD) and African Party for the Independence of Cabo Verde (PAICV), respectively. The cooperation between the two parties has been relatively smooth. Occasionally, the president has vetoed legislative initiatives. Such differences are resolved through the institutional channels prescribed by the constitution, attesting to the strength of Cabo Verde’s democracy. The government’s commitment to its reform agenda has been strong, and progress has been made on tax reform, tighter regulation of the banking system and the Growth and Poverty Reduction Strategy (GRSP III).

Cabo Verde’s history of political stability and respect for the separation of powers is encouraging. In addition, the fact that the next round of national elections is not due until 2016 opens a window of opportunity for the resumption of the structural reform agenda and may facilitate difficult political decisions necessary to enhance the country’s macroeconomic resilience.

Economic Overview

In December 2007, Cabo Verde achieved middle-income country status. Good governance, sound macroeconomic management, including strong fiscal discipline and credible monetary and exchange-rate policies, trade openness and increasing integration into the global economy, a responsible use of donor support, and the adoption of effective social development policies have produced impressive results throughout the Cabo Verdean archipelago. Growth in real income per capita reached more than 5 percent during 2005-08, well above the average for Sub-Saharan Africa and for Small-Island States.  

However, Cabo Verde is currently facing a difficult macroeconomic scenario with high fiscal and external deficits, a slowdown in growth and adverse external conditions reflecting Europe’s economic crisis. The fiscal deficit is high at around 10% of gross domestic product (GDP), debt climbed sharply from 86% of GDP in 2011 to 97% and international reserves are very low - about 3.4 months of prospective imports. Economic growth slowed to 4.3% in 2012, down from five percent in 2011. The slowdown reflects the fall in private investments associated with the drop in foreign direct investment (FDI) flows and tighter monetary conditions. Benefitting from tourism trade diversion caused by political disruptions in North Africa, tourism exports have remained robust and increased by 12.3%. Public investment is still mitigating the slowdown in economic activity but the space for further stimulus is limited.

Public debt continued its upward trajectory, reaching 82.9% of GDP in 2012. Public debt has been increasing rapidly, from 62.4% in 2008. Domestic debt accounts for only 21.2% of GDP, with an average interest rate of five percent and average maturity of seven years. The remaining 62.9% are external, largely concessional, debt. The latest analyses of the International Monetary Fund (IMF) suggest that risks to debt sustainability increased but that debt service remains manageable so long as the government pursues its fiscal retrenchment.

The service sector, centered on tourism, remains the engine of growth, but businesses across sectors have become relatively pessimistic. Both agriculture and manufacturing only play a minor role in Cabo Verde. As in the previous years, services constitute the backbone of Cabo Verde’s economy, contributing 3.2 percentage points to growth in 2012. The central bank estimates that the tourism industry accounts for 21.1 of GDP and makes up 60.8% of the service sector. However, despite strong performance in tourism, business confidence in the sector remains depressed—reflecting a challenging global environment. Toward the end of 2012, most businesses have either been pessimistic or become less optimistic. The construction sector remains the least confident sector, following the stagnation of new investments in hotels and secondary and holiday homes after the crisis of 2009.

New employment figures point at unequal opportunities for women and youth. Poverty is falling. Institute of National Statistics (INE) has revised national employment numbers, in accordance with standards of the International Labor Organization. According to most recent available data, unemployment in 2011 stood at 12.7%, but with youth unemployment more than double at 27.1%. While women are only 1.8 percentage points more likely to be unemployed than men, labor force participation among women is 13.8 percentage points lower than among men. High youth employment and low participation rates among women are symptomatic of insufficient access to training opportunities and rigid labor regulations protecting existing jobs whilst deterring hiring. Accordingly, productivity has stagnated and a considerable mismatch exists between the demand and supply of skills in the labor market.

Economic Outlook

Growth is likely to slow further in 2013 to 4.1%, as domestic demand remains weak; the continued strength of tourism exports depends on the economic situation in Europe. Falling business confidence in the latter part of 2012 is likely to continue, reducing private investment. The government’s investment program is being cut back. Falling bank lending, higher deposit interest rates, and a probable declining growth in remittances are suppressing private consumption. These developments exert a drag on overall growth. Tourism exports have been the silver lining. But the lackluster recovery in Europe, with low inflation and weak demand, places strains on the sector.

Political resolve to push forward with the structural reform agenda will be key to future growth. Raising domestic revenue through the fiscal reforms under way will help contain the ballooning deficit. The financial legislation under way will help strengthen Cabo Verde’s banking sector. The Poverty Reduction Support Credit III (GPRSP III) envisages key structural reforms that will make Cabo Verde’s economy more competitive. These reforms are crucial to sustaining Cabo Verde’s rapid progress in prosperity.

Development Challenges

As a small island state transitioning to middle-income status in an uncertain global environment, Cabo Verde faces a set of complex development challenges. In 2007 Cabo Verde became one of only three nations to graduate from the United Nations’ list of least developed countries. Despite this remarkable performance, Cabo Verde faces the challenge of transitioning to a middle income country (MIC) in addition to dealing with the obstacles that come with being a small island economy. The transition from IDA to the International Bank for Reconstruction and Development (IBRD) brings added challenges for access to concessional finance. The declining access to concessional finance and rapid debt accumulation are expected to increase borrowing costs and reduce the government’s fiscal space needed to sustain high public investment rates. Additionally, Cabo Verde faces limited opportunities for developing economies of scale or broadly diversifying its productive base and consequently relies on a narrow range of economic sectors, it is also subject to high unit costs of core infrastructure and public goods, as well as increased transportation costs arising from its relative remoteness and isolation, and it is especially susceptible to natural disasters and to the effects of climate change.

Cabo Verde is on track to achieve nearly all of its Millennium Development Goals (MDGs) by 2015. The country ranked 132^ndout of 186 countries in the 2012 United Nations Development Programme (UNDP) Human Development Index.

The latest poverty mapping of 2012 suggests that economic growth has continued to translate into poverty reduction, cutting the poverty rate from 37% in 2000 to 27% in 2010. Poverty fell particularly in areas where tourism, a key source for jobs, is concentrated.

Progress in reducing poverty has been slower in rural areas, where 72% of the poor live and where 30% of the population lives in absolute poverty, compared to 12% of the urban population. It has also varied across islands. The islands with the largest rural populations (Santo Antão, Santiago, São Nicolau and Fogo) have experienced the highest rates of poverty and food insecurity. 

The sharp reduction in poverty since 1990 has been complemented by significantly increased access to education and health care. The net primary enrollment rate in elementary education rose from 72% in 1990 and 1991 to 95% in 2005 and 2006, while net secondary enrollment reached nearly 60% in 2005 and 2006. Adult literacy rates are high (approximately 84% in 2010, 98% among the youth), and Cabo Verde has now achieved parity for girls and boys in school enrollment. Infant mortality has been reduced from 45 to 24 per 1,000 live births since 1990, maternal mortality has also declined as births attended by skilled health personnel have risen rapidly from 54% in 1995 to around 90%, and life expectancy at birth (74 years) is the third highest in Africa.

At the same time, Cabo Verde faces important social challenges with unemployment among vulnerable groups. Though the proportion of the labor force unable to find formal work fell fairly steadily during the decade to 2008, unemployment rose again slightly in 2009 to 13.1% (20.9% per the earlier methodology for measuring unemployment), and remains significantly higher among youth, women and rural populations, more over there are sharp differences across islands, reflecting a misalignment between skills and job opportunities and constraints in domestic migration, even though there has been significant movement towards urban areas that has put pressure on basic services. 

The Government’s Second Growth and Poverty Reduction Strategy Project (GPRSP II) is designed to address these challenges through five pillars of engagement; promoting effective governance, strengthening human development, addressing structural and social challenges from competitiveness, investing in infrastructure and enhancing social cohesion.

Last updated April 2013

World Bank Engagement

As of February 28, 2013, the World Bank has approved 36 projects for Cabo Verde amounting to about US$382 million, of which US$317 million has been disbursed. Of the 36 projects, 32 projects have now closed, and the current portfolio comprises of four active projects, including one regional project and one International Bank for Reconstruction and Development (IBRD) project, for total commitments of US$94 million. These projects include small and medium enterprises capacity building and economic governance, road support, recovery and reform of the electricity Sector (IBRD), and the West Africa Regional Fisheries program.

In recent years, analytical work in Cabo Verde has included an air transport diagnostic, a higher education sector review, a Country Economic Memorandum (CEM) and a public expenditure management and financial accountability report. Analytical work planned for delivery in 2013 includes increasing linkages for pro-poor tourism study and non-lending technical assistance to strengthen public investment program capacity.

A Country Partnership Strategy covering the period of 2009 to 2012 was discussed by the Bank’s Board of Executive Directors on April 21, 2009. The Bank’s objective for this CPS was to help the government sustain high levels of growth and reduce unemployment, poverty and inequality. To achieve these major results, the Bank is providing technical and financial support to promote good governance and public sector capacity, improve competitiveness and the investment climate for private sector-led growth, and strengthen human capital and social inclusion.

A Country Partnership Strategy Progress Report (CPSPR) was disclosed in January 2011 reviewing the relevance of the Country Partnership Strategy (CPS) and providing an update on the country context and the evolution of key risks, progress to date under the CPS and the adjustments that are proposed in the country program.

Great strides were made during the FY09-12 CPS period to improve public management and strengthen public administration regulatory and oversight role. Achievements were also substantial in improving competiveness and investment climate and Cabo Verde’s Doing Business (DB) ranking improved from 143^rd in 2008 to 122^nd in the 2013.

A new CPS for the period of 2013-2016 is currently under preparation.

International Finance Corporation (IFC)

The IFC’s strategy in Cabo Verde is focused on selective investments in the financial markets and tourism sectors to increase access to finance to small and medium enterprises (SMEs) and create jobs. In advisory, the Cabo Verde government has requested IFC to provide support in trade, licensing and overall investment climate; and IFC's public-private partnership (PPP) advisory team is keen on supporting the private provision of infrastructure with a focus on transport and renewable energy, in collaboration with the World Bank. IFC made a EUR4 million investment in T Plus to develop a second GSM digital cellular network.  This investment has now fully repaid. Both leasing program and a project to develop a private credit bureau were completed.

Multilateral Investment Guarantee Agency (MIGA)

MIGA does not have any exposure resulting from investments in Cabo Verde.

World Bank Institute (WBI)

Cabo Verde has not been an active participant in WBI programs to date. However, where relevant, participants have been invited to attend regional activities.

Last updated April 2013

Project Results Highlights  

HIV/AIDS Project

Bank support for Cabo Verde’s efforts to fight HIV/AIDS began in 2002 as a result of a request by government authorities. At the time, there was insufficient donor attention to the issue and the country had inadequate resources to address the epidemic.  

The objectives of the Bank supported HIV/AIDS project that closed in 2009 were to assist Cabo Verde in reducing the spread of HIV/AIDS in its population, mitigate the health and socioeconomic impact of HIV/AIDS on persons infected with or affected by HIV/AIDS within the country’s territory, thus sustaining an economically productive population, and building strong and sustainable national capacity to respond to the HIV/AIDS pandemic.

At the completion of the project, there was a consensus that the project had indeed had a significant impact on transforming the discussion of HIV/AIDS from a taboo subject to a national issue. The project also helped strengthen certain key institutional changes by making the national HIV/AIDS program multi-sectoral and mainstreaming HIV/AIDS activities into the action plan of every government agency. It ensured a participatory national HIV/AIDS program with private sector (for-profit and not-for-profit) participation and community empowerment, expanded the national capability from a small unit within the Ministry of Health to a range of public and private sector entities at national, municipal, and local levels.   These results have translated into a decline in HIV prevalence and greater public awareness as reflected in a sharp rise in reported use of prophylactics among young men and women.

Growth and Competitiveness Project

The overall objective of the Growth and Competitiveness Project was to broaden the base of private participation in Cabo Verde's economic growth, enhance private sector competitiveness and further develop its financial sector. To this end, through the project components the financial sector was to be strengthened, and restructured, namely through the financial sector reform, which includes reform of the pension system. Private sector competitiveness was to be enhanced by supporting reforms within the legal system, as well as tax reforms, and alleviating the administrative barriers. The focus was on capacity building of selected Government ministries, and agencies that interact with private firms, namely to improve institutional capabilities, and business delivery.

As a result of the project, impressive progress was made in the areas of investment climate and regulatory capacity. In the financial sector, the combined efforts of the government, the Central Bank of Cabo Verde, the commercial banks and the Chambers of Commerce have substantially strengthened the financial system, expanded the availability of financial products and significantly deepened the financial market.  Substantial gains have also been achieved with respect to pension reforms.

Road Sector Support

The objective is to enhance Cabo Verde’s road sector management, by supporting institutional reform of the road sector and improved functioning of related civil works markets, and by ensuring better access to social and economic opportunities due to improved mobility for affected populations.  The project is performing very well with works having been completed more than a year ahead of project closing. These include the completion of road construction on São Vincente (Salamansa-Norte de Baia), Maio (Alcatraz-Figueira da Horta) and São Nicolau (Ribeira Brava-Tarrafal road).  As a result, the asset value of the national road network has been increased by around 15% to more than ECV 600 billion.  Sustainability is likely to be assured via regular maintenance funded via a newly established Road Maintenance Fund, which is financed by a road maintenance (fuel) levy that went into effect in 2009. Additional financing in the amount of US$10million was approved for the transport sector on April 5, 2011.  

Public Financial Management – The Poverty Reduction Support Credit (PRSC) series

Four PRSCs (IV-VII) were implemented over the course of the FY09-12 CPS period. PRSC IV was designed as a standalone operation in a single tranche credit of US$10 million equivalent to support the last year of implementation of GPRSP I and enable continued policy dialogue with the GoCV during the preparation of GPRSP II. Under PRSC IV, the government made progress in promoting good governance and improved outcomes in the health and education sectors for greater human capital development. PRSC V supported policies and institutional reforms conducive to private sector development and improving competitiveness in the service sector. It also promoted good governance through public expenditure management and civil service reforms and supported a stronger statistics and monitoring and evaluation system. Similarly to PRSC IV and V, the sixth and seventh PRSC development policy operations focused on good governance and competitiveness and growth.

Through the PRSC series, the Bank’s joint work with the Cabo Verde government in linking key policy reform processes greatly enhanced public financial management. The joint work allowed a link to medium term investment planning to long term strategic objectives, better screening for public investment, integrate financial management systems to strengthen the budgeting of performance contracts, and establish transparent procurement measures to track the quality of investments. This enabled the country to maximize the return of its public investments.

Last updated April 2013