Located off the west coast of Africa, Cabo Verde is an archipelago of ten islands of which nine are inhabited. The country has around 500,000 inhabitants. Only 10% of its territory is classified as arable land and the country possesses limited mineral resources. Despite the arid climate and mountainous terrain, Cabo Verde has been developing rapidly, in a large part thanks to its flourishing tourism industry. In addition to boosting tourism, the government is making efforts to turn the islands into a trade and transport hub.
Politics in Cabo Verde has 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 West African 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. The next parliamentary, presidential, and municipal elections are scheduled for early 2016.
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 underpinned an impressive development trajectory. Growth in real gross domestic product (GDP) per capita averaged 7.1% between 2005 and 2008, well above the average for sub-Saharan Africa and for small island states.
However, the global financial crisis did not leave Cabo Verde unscathed. Economic developments in Cabo Verde closely mirror developments in the Eurozone. Accordingly, the country experienced a recession in 2009, recovered modestly to attain real growth of 4% in 2011 and has slowed again since. For the last three years, Cabo Verde’s GDP growth rate has languished between 1 and 2%, far below the 6-7% rates experienced prior to the 2008/09 international crisis. Slowing tourism, reflecting sluggish growth in the Eurozone and dwindling foreign direct investment (FDI), as well as persistent high unemployment and vulnerabilities in the banking sector depressed consumer confidence and domestic investment and contributed to dampening growth. Public investment increased during the crisis and subsequent recovery, but rising debt levels have led to fiscal consolidation. FDI began to return in 2014, and tourism receipts are recovering, again driving growth, which is expected at around 3%.
The government has been aiming to support growth through an ambitious public investment program. Yet the program has high import content, and its effect on growth has so far been limited. The public investment program is mostly externally financed and at concessional terms. The high level of borrowing has resulted in persistent double-digit fiscal deficits and public debt that is currently estimated at 114% of GDP and is estimated to reach 120% in 2017.
From 2003 to 2008, the national poverty headcount rate dropped from 37% to 27%, while the extreme poverty rate dropped from 21% to 12% (using national definitions). Cabo Verde’s tourism sector, the country’s driver of growth, has been a main contributor to this significant decrease. In addition, significant progress has been made to boost shared prosperity. The Gini coefficient fell from 0.55 in 2003 to 0.48 in 2008 while the income of the bottom 40% as a share of total income increased from 9.9% in the same period. Moreover, the share of expenditures of the bottom 40% in total expenditures increased from 7% to 19%, demonstrating that the welfare of the bottom 40% has improved substantially.
Growth is expected to pick up modestly in 2015. This assumes a somewhat stronger economy in Europe, Cabo Verde’s main trading partner and main source of FDI. In the past, FDI has been the main driver of Cabo Verdean growth and although the return of FDI is still cautious, it can be expected to provide an impetus to growth again. In addition, a strengthened financial sector would be in a better position to respond to monetary policy incentives and accelerate credit growth to the private sector. In light of this, real growth for 2015 is currently estimated at 3%.
Cabo Verde ranks 123rd out of 187 countries in the UNDP’s 2014 Human Development Index (HDI). Cabo Verde’s average life expectancy, estimated at 71 years of age, is the highest in sub-Saharan Africa. The infant mortality rate fell from 26 per 1,000 live births in 2007 to 15 in 2011. The maternal mortality rate fell from 36 per 100,000 live births in 2006 to 26 in 2011. By 2011, 94% of children under one year of age were fully immunized, and the percentage of the total population living less than half an hour from a health center reached 86%. Similarly, education outcomes put Cabo Verde at the top of sub-Saharan Africa. The adult literacy rate is estimated at 87%, although disparities continue to persist between men and women. Cabo Verde is on track to meet all but one of the MDGs (e.g. maternal health) by the end of 2015.
Consolidating its achievements as a middle income country and further strengthening the conditions for poverty reduction and boosting shared prosperity will be key challenges for Cabo Verde. A small open economy like Cabo Verde’s is vulnerable to the vagaries of global economic developments. Given the fixed exchange rate, it will be vital for the country to rebuild fiscal buffers to absorb future shocks. Diversification within and beyond the tourism sector, and more flexible labor markets can help to absorb shocks.
On the structural side, Cabo Verde has to deal with fragmentation across nine inhabited islands and the distance between islands results in high transport costs. The country’s small size reduces the scope for increasing returns to scale. Unit labor costs are high. Infrastructure constraints still exist and the delivery of public services, including energy, can be improved. An arid climate reduces the potential for agriculture although considerable efforts to enhance water mobilization are beginning to yield results. Finally, the country is vulnerable to climate change, rising sea levels, and natural disasters.
Last Updated: Nov 19, 2015