Macroeconomic performance and outlook
The economic growth momentum in Cabo Verde remains strong with real GDP growth estimated at 5% in 2019, thanks to robust activity in industry, fisheries, commerce, and tourism. Public investment’s impact on growth underperformed its potential due to inefficien- cies in the large parastatal sector, which resulted in high public debt. Fiscal consolidation was put in place to counter debt, including a 3% of GDP cap on domes- tic borrowing. These measures started to pay off as the fiscal deficit contracted below 3% of GDP in 2018, financed through concessional loans and treasury bond issuances. Public debt came down from 128.4% of GDP in 2016 to 123.9% in 2018, and is projected to decline to 98.5% of GDP by 2023.
Monetary policy has been in line with maintaining the exchange rate peg to the euro and, combined with the appreciation of the real exchange rate, helped keep inflation below 2%. The current account deficit has nar- rowed, reflecting higher export revenues amid declining import demand, and is financed mainly through official and private inflows. Meanwhile, the reduction of public investment due to fiscal consolidation has limited infra- structure investments to accelerate economic diversifi- cation. As a result, inadequate interisland connectivity hampers the competitiveness of local firms in global value chains. High electricity tariffs—about $0.25/KWh compared with $0.19/KWh in Mauritius—also impede manufacturing output growth as most firms rely on costly diesel power, draining foreign reserves.
Cabo Verde’s economic growth has translated into substantial poverty reduction (from 58% in 2001 to 35% in 2015) and declining income inequality (from a Gini coefficient of 0.53 in 2001 to 0.42 in 2015). But high unemployment rates, especially among youth and women (32.4%), could undermine social cohesion.
Tailwinds and headwinds
Real GDP growth is projected to average 5% during 2020–21, driven by industry, fisheries, commerce,
and tourism. Cabo Verde could capitalize on its ocean wealth by addressing transport and logistical infrastruc- ture bottlenecks to develop a more diversified econ- omy. The March 2019 privatization of Cabo Verde Air- lines and the August 2019 entry into operation of the maritime transport concessionaire (Cabo Verde Inter- ilhas) are steps in the right direction to enhance market integration and improve the flow of goods and people. Plans to adopt the ECOWAS common external tariff, and adhere to the future single regional currency (eco) could increase intraregional trade.
Tourism accounts for 21% of GDP, and tourist arriv- als are expected to reach 1 million by 2020. Even so, large hotels and resorts still import more than 80% of their food and beverage needs, at an estimated cost of $29 million annually. Tourism would benefit from accelerating the planned infrastructure investments, notably the construction of the Maio island port and the regional multimodal Praia–Dakar–Abidjan transport corridor.
Inadequate infrastructure constrains interisland mobility and tourism development. Inadequate cargo handling infrastructure, deficient airport facilities across islands, and lack of logistics to support inter- modal transport tend to increase the costs of tour- ism services and constrain value chain development. Nonperforming loans—about 12.2% of total loans— remain a source of concern and could depress con- sumption and investment and slow economic growth. High dependence on tourism and remittances makes the country vulnerable to adverse developments in Europe, including risks related to Brexit—about 25% of the country’s tourists come from the United Kingdom.
Climate risks, if not mitigated, could derail both growth and equity objectives. Although the govern- ment attaches great importance to skill development— spending 5.4% of GDP on education, well above the developing country average of 4.1%—the lack of skills remains a challenge for the private sector. To reap a demographic dividend, a subsidized internships pro- gram has placed 5,000 youth in the labor market.
Health sector preparedness
The health system faces shortages in key medical staff, equipment and consumables for laboratories, and geo- graphic fragmentation accentuates the capacity constraints. The 2019 Global Health Security Index ranked the country 146 among 195 countries globally, and 30 of 54 in Africa. The current budget spending on health (5.2% of GDP) is close to Africa’s average (5.3%). The authorities have mechanisms for monitoring the surge of epidemics, but inadequate human resources and equipment constrain the system’s prepared- ness for treating illnesses and protecting health workers.
The government’s Crisis Preparedness and Action Plan is meant to protect the economy and vulnerable households. Key measures include:
- Health. The budget was scaled up for key medical equipment and salaries for medical staff. The national laboratory capacity was strengthened to perform 500 additional tests, but a lack of reagents and the limited surveillance and early detection of suspected cases remain challenges.
- Economic. The government deferred tax payments until December 2020 and approved €36 million in state-guar- anteed lines of credit to protect private businesses. The central bank reduced its benchmark interest rate by 125 basis points to 0.25%, dropped the permanent credit liquidity facility by 250 basis points to 0.5%, and approved a special credit line of €400 million to commercial banks at an attractive interest rate of 0.75% to boost liquidity.
- Social. The government approved €369,000 for 8,000 households in extreme poverty, €2.7 million targeting 30,000 informal sector workers, food assistance for 22,500 families, and scaled-up social protection for the elderly.