Cabo Verde is an archipelago of 10 islands located off the west coast of Africa. The country has around 500,000 inhabitants. With only 10% of its territory classified as arable land and possessing limited mineral resources, Cabo Verde’s arid conditions and mountainous terrain put the country at a disadvantage for agricultural production. However, despite climatic and geographic limitations, the country’s tourism industry has developed rapidly and the government is making efforts to turn the islands into a trade and transport hub.
Recent Political Developments
Politics in Cabo Verde have been largely consensus-oriented, with majority rule and civil liberties widely respected. Since gaining independence from Portugal in 1975, Cabo Verde has not experienced a single coup d’état, a regional record shared only by Senegal. Elections are considered free and fair, and parties in power alternate regularly. Currently, the president and prime minister are backed by competing political parties, a situation which Cabo Verde’s strong institutions have been able to accommodate in an exemplary way.
In December 2007, Cabo Verde graduated from the United Nations list of Least Developed Countries. Good governance, sound macroeconomic management, trade openness and increased integration into the global economy, as well as the adoption of effective social development policies have produced impressive results throughout the archipelago. Growth in real gross domestic product (GDP) per capita reached 7.1% during 2005-08, well above the average for sub-Saharan Africa and for small island states.
However, Cabo Verde is still facing a difficult macroeconomic context with high fiscal and external deficits, weak growth, and an uncertain global environment. The fiscal deficit (including net lending) as a percentage of GDP remains in the double digits and public debt climbed sharply from 78.5% of GDP in 2011 to 94%. Economic growth slowed to -1.3% in 2009, recovering slightly in subsequent years but remaining well below the historical average. The slowdown reflects the fall in private investments associated with the drop in foreign direct investment (FDI) flows and tighter monetary conditions. However, Cabo Verde’s tourism exports remain robust as the country has benefitted from trade diversion caused by political disruptions in North Africa. Although public investment is still mitigating the slowdown in economic activity, there is limited room for further stimulus.
The service sector, focused on tourism, remains the main driver of growth and accounts for about three-quarters of Cabo Verde’s GDP. The central bank estimates that the tourism industry accounts for 21% of GDP. Aside from tourism, agriculture and manufacturing play a minor role in Cabo Verde’s economy. The construction sector remains the least confident sector, following a stagnation of new investments in hotels and secondary residences following the 2009 crisis.
Employment statistics point to unequal opportunities for women and youth. Overall unemployment stood at 12.7% in 2011, however within that percentage, youth unemployment in particular stood at 27.1%. While women are only 1.8 percentage points more likely to be unemployed than men, the labor force participation among women is 13.8 percentage points lower than that among men. High youth employment and lower participation rates among women are symptomatic of insufficient access to training opportunities and rigid labor regulations protecting existing jobs while deterring new hires.
From 2002 to 2010, the national poverty headcount rate dropped from 37% 27%, while the extreme-poverty rate dropped from 21% to 12%. Cabo Verde’s tourism sector is likely to have been a main contributor to this significant decrease. In addition, great progress has been made in boosting shared prosperity. The Gini coefficient fell from 0.57 in 2002 to 0.47 in 2010. Solid progress has also been noted in education and health indicators. Cabo Verde ranks 133rd out of 187 countries in the United Nations Development Program’s 2011 human development index (HDI), making it the third-highest ranking in sub-Saharan Africa (SSA) and putting it in the “medium human development” category. Cabo Verde is currently on track to achieve most of its Millennium Development Goals (MDGs) by 2015.
Growth in 2013 is estimated to have slowed to 0.5%, as domestic demand remained weak and the continued strength of tourism exports depends on the economic situation in Europe. Business confidence indicators have recently shown mixed performances but remain pessimistic overall. In addition, the Government’s investment program is being cut back. This, along with a decrease in bank lending, suppresses private consumption and investment. All of these developments continue to exert a drag on overall growth. Tourism exports have been the silver lining, however even the growth rate of tourism has seen a decline.
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. Recently approved financial legislation will help strengthen Cabo Verde’s banking sector. The Growth and Poverty Reduction Strategy Paper III (GPRSP III) for the period 2012-2016 envisions key structural reforms that will be crucial to revitalizing Cabo Verde’s rapid progress and stimulating a more competitive economy.
As a small island state transitioning to a middle income status in an uncertain global environment, Cabo Verde faces a set of complex development challenges. Despite remarkable progress over the last two decades, development challenges persist. Cabo Verde’s transition from prior eligibility for International Development Association (IDA) funds, to the more market-based terms of the International Bank for Reconstruction and Development (IBRD), brings additional challenges in accessing concessional finance. Declining access to concessional finance along with rapid debt accumulation is expected to increase borrowing costs and reduce the Government’s fiscal space. In addition, Cabo Verde faces limited opportunities for developing economies of scale or 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. Finally, it is especially susceptible to natural disasters and the effects of climate change.