Located 500 kilometers off the west coast of Africa, Cabo Verde is an archipelago of ten islands of which nine are inhabited. The country has an estimated population of 520,500. 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, business, and transport hub.
Political Context
Politics in Cabo Verde have been largely consensus-oriented, with majority rule and civil and basic 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. The latest round of parliamentary elections was held in March 2016, resulting in an orderly and constitutional change of government, following the victory of the opposition party Movement for Democracy (MpD). A new government led by Prime Minister Ulisses Correia e Silva took office in April. They succeeded an African Party for the Independence of Cape Verde (PAICV) government which had been in power for 15 years. The two parties dominate Cabo Verde’s political scene which has noticed the modest rise of a third party–the Democractic and Independent Cape Verdean Union (UCID)–and are both fairly centrist, with MpD having a slightly freer market focus, and PAICV having a (now rather distant) socialist heritage. Having won the parliamentary and municipal elections and also provided political support to the presidential candidate in 2016, the new government faces an unprecedented political space to implement tough reforms. Under Cabo Verde’s semi-presidential system, both the prime minister and the president have political power granted by the constitution, and the government is accountable to Parliament.
The government program includes a commitment to privatizing various sectors of the economy, and addressing macroeconomic challenges in order to provide 45,000 new jobs by the end of the term. However, early signs of progress have been limited.
Economic Overview
The new Government of Cabo Verde inherited a challenging macroeconomic situation with public debt at 130% of GDP at the end of 2016. Growth is estimated at over 4% in 2016, a recovery from 1.5% in 2015, but not enough to bring down debt levels. For 2017 and beyond, debt is likely to continue increasing from government liabilities for largely insolvent state-owned enterprises (SOEs), particularly the airline TACV and social housing “Casa para Todos”. Fiscal consolidation is needed to create a sustainable debt path and allow for a growth-oriented, fiscal policy. Positive actions by the government include: (i) strengthened financial stability, including closing the bankrupt Banco Novo; and (ii) rationalizing the public investment pipeline. However there has been little progress on key reforms needed for macroeconomic stability.
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 which began 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. The rebound in foreign direct investment (FDI) combined with policy reforms to improve the investment climate are expected to support domestic demand leading. 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 3 to 4% 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
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). A comprehensive household income expenditure survey was completed in spring 2016 and the data is currently being prepared for analysis. Cabo Verde’s tourism sector, the country’s driver of growth, has been a main contributor to this significant decrease.
Cabo Verde ranks 122nd out of 187 countries in the United Nations Development Programme’s 2016 Human Development Index (HDI). Cabo Verde’s average life expectancy, estimated at 73,5 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 20. 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 with the euro, 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 since it has an active volcano on the island of Fogo that last erupted in November 2014.
World Bank Group Engagement in Cabo Verde
World Bank Group (WBG) commitments in Cabo Verde total $78 million ($53 million from IBRD and $25 million from IDA), of which 86% of the total amount has been already disbursed as of March 2017. The current portfolio comprises of three active projects covering transportation sector reform, electricity sector reform (IBRD), and tourism sector development.
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.
The World Bank Board of Executive Directors discussed priority activities for fiscal years 2015-2017 in December 2014. The Country Partnership Strategy (CPS) is in line with the third growth and poverty reduction strategy paper (GPRSP III), and guided by the World Bank Group’s two strategic goals of reducing poverty and boosting shared prosperity. The strategy positions agriculture as the cornerstone of poverty reduction, and intends to help strengthen the linkages between tourism and the agriculture and fisheries sectors. The WBG program also aims to support the government’s target of reducing the poverty rate to 20% by 2016.
International Finance Corporation (IFC):
The IFC, under the joint CPS for FY14-17, is 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 financing for small and medium enterprises (SMEs); and (iv) joining forces with the World Bank to provide support in trade, licensing, and investments.
Last Updated: May 04, 2017
