Country Overview
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.
Political Context
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. Parliamentary elections just took place and will be followed by presidential and municipal elections which are scheduled for later in 2016.
Economic Overview
The post-global crisis recovery in Cabo Verde remains fragile as economic growth in the largely tourism dependent archipelago slowed to approximately 1% in 2015—almost half the rate of 2014. The deceleration in growth reflected a fall in foreign direct investments, one of the main engines of growth in the country, as well as the continued rationalization of public investment in the context of rising debt. Economic activities were further constrained by the anemic growth in credit to the private sector despite respective reductions of 0.25 and 3 percentage points in the benchmark and required reserve rates by the central bank during the year.
With the slowdown in investments, spending on the associated imports also declined and contributed to an improved external current account position in 2015. The external position also benefitted from a notable increase in private remittance inflows as well as lower repatriated profits by foreign firms. Reserves remained fairly robust, well above the internal international benchmark of 12 weeks of imports.
Notwithstanding the slowdown in growth, the fiscal deficit is estimated to have improved in 2015 reflecting government efforts to contain expenditure while boosting revenue collections. The stock of public debt, however, remain very high, above 115% of GDP.
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.
Medium-term outlook
With modest growth projected for Cabo Verde’s major trading partners, the pipeline for foreign direct investment projects is expected to slow. Large investments in tourism scheduled to begin in the first half of 2016, and which will further diversify the tourism product is expected to provide much needed impetus for growth over the next three years. Tourist demand is, however, likely to remain weak, consistent with the pace of economic growth in the main source markets. On the domestic side, prices are expected to remain low due to a mix of local and international developments, thereby, providing the base for further loosening of monetary policy. In this context, the economy is expected to expand in the range of 1.5 to 2.5% of GDP between 2016 and 2018.
Reducing the public debt burden remains a major challenge. While most of this debt is on concessional terms, gross financing needs are increasing, limiting the ability of the government to use fiscal policy to absorb shocks. The government is further challenged to accelerate efforts to rationalize public investments and contain contingent liabilities in the country’s public bodies without impeding the recent growth momentum. The government has invested heavily in the country’s infrastructure in recent years, and the challenge now is to enable the private sector to utilize it for growth, job creation, and poverty reduction.
Social Context
Cabo Verde ranks 122nd out of 187 countries in the UNDP’s 2015 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.
Development Challenges
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 that 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: Apr 12, 2016
