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. 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.

Economic Overview

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 133^rd 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.

Economic Outlook

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. 

Development Challenges

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.

World Bank Engagement

The World Bank has approved 37 projects in Cabo Verde which amount to about $401 million, $342 million of which has already been disbursed. As of March 04, 2014, 33 of the 37 projects have been completed. The current portfolio comprises of four active projects, including one regional project and one IBRD project, all of which totally $83 million in commitments. These projects address small and medium enterprises capacity building, economic governance, transportation sector reform, electricity sector reform (IBRD), and the fishing industry through 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), a public expenditure management and financial accountability report, a pro-poor tourism study, and non-lending technical assistance to strengthen public investment program capacity.

A CPS 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 to review the relevance of the Country Partnership Strategy (CPS) and provide an update on the country context and the evolution of key risks, progress to date, and proposed adjustments to the country program.

A new CPS for the period of 2012-2017 is currently under preparation.

International Finance Corporation (IFC)

The IFC, under the new joint CPS for FY14-17, will be focused on (i) supporting public private partnerships (PPPs) and the private infrastructure provisions related to transport and renewable energy, in collaboration with the World Bank; (ii) bringing part of the financing to private sponsors under PPPs (as subject to IFC’s investment rules); (iii) identifying selective investments in the financial markets and tourism sectors to increase access to finance for small and medium enterprises (SMEs); and (iv) joining forces with the World Bank to provide support in trade, licensing, and investments.

Multilateral Investment Guarantee Agency (MIGA)

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

Highlights of Recent Project Results  

Road Sector Support

On June 30, 2013, the Road Sector Support Project (RSSP) closed satisfactorily with significant achievements at the institutional level. Specific reforms such as the creation of the Road Institute and of the Road Fund, supported by credit in the road sector, proved efficient and sustainable. Despite some cost overruns, the works financed under the RSSP were completed satisfactorily, and thanks to the strengthened capacity of the Road Institute, cost overturns actually became virtually non-existent for the last contracts financed under the credit.

A new credit, the Transport Sector Reform project was approved in June 2013 and will support the scaling up of performance based road maintenance on an ever larger section of the national network. The project will combine the rehabilitation of key road sections and routine maintenance into 4-year contracts. It will also support the Ministry of Infrastructure in the implementation of key reforms in the transport sector to promote the involvement of the private sector in the management of airports and harbors, and the delivery of sea transport services. The credit also supports a Road Safety Action Plan along with additional measures that further consolidate the country's road maintenance policy.  

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

Four Poverty Reduction Support Credits (PRSC IV-VII) were implemented over the course of the FY09-12 CPS period. PRSC IV was designed as a standalone operation with a credit of $10 million, an amount that also will also cover the last year of the first Growth and Poverty Reduction Strategic Paper’s (GPRSP) implementation and enable continued policy dialogue with the Government of Cabo Verde in preparation of the second GPRSP. 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, supported civil service reforms, and encouraged a stronger statistics and monitoring and evaluation system. Like the PRSC IV and V, the PRSC VI and VII focused on good governance, competitiveness and growth. PRSC VIII, scheduled to disburse in May 2014, is the first budget support operation of another series of three, and continues to focus on these themes. Throughout the PRSC series, the Bank’s joint work with the Government of Cabo Verde to link key policy reform processes served to greatly enhance public financial management and produced reforms in several other areas such as State-Owned Enterprises, the investment climate, trade facilitation, infrastructure management, human capital formation, and the environment.