Economic growth was an estimated 3.9% in 2018, down marginally from 4.0% in 2017. This performance was supported by strong growth in the electricity and water sectors (22.8%), manufacturing (14.2%), tourism and hotels (14.9%), fisheries (9.4%), retail trade (8.1%), and financial intermediation (8.1%).
Fiscal consolidation helped reduce the fiscal deficit to an estimated 2.4% in 2018 from 3.1% in 2017, and the deficit is projected to continue to narrow gradually, to 1.9% in 2019. But public debt has been above a sustainable threshold—126% of GDP in 2017.
The Banco de Cabo Verde’s cut its policy rate by 200 basis points to 1.5% in June 2017, prompting a decline in commercial banks’ average lending interest rate from 6.5% to 4.5% at the end of 2018. As a result, credit to the economy expanded by 7.5%. Consumer price index inflation remains low, rising to 1% in 2018 from 0.8% in 2017 due to expected price increases in food and energy products. Foreign reserves cover about 5.9 months of imports of goods and services and remain adequate to maintain the unilateral exchange rate peg to the euro.
The current account deficit widened from 7.6% in 2017 to 8.5% in 2018 as total import growth outpaced export revenues (in particular those from tourism) amid declining remittances. Apart from tourism, the country’s main exports are fisheries and manufactured goods (clothing and footwear). The main imports are fuel, equipment, machinery, and consumer goods, mostly from Spain and Portugal, the country’s largest trading partners.
The economy is expected to maintain real GDP growth, projected at 4.1% in 2019 and 4.8% in 2020. Growth is expected to be driven by remittance inflows, manufacturing, continued growth in tourism, and increased public infrastructure spending. Private investment supported by favorable domestic credit conditions will also contribute to economic growth.
Tailwinds and headwinds
Headwinds to the outlook are exogenous. Emerging global trade tensions among China, Europe, and the United States—key trading partners to the island economy—could hurt exports. As an archipelago state, Cabo Verde is highly fragile and vulnerable to climate change, thus requiring additional resources to build resilience. The unilateral exchange rate (pegged to the euro) requires fiscal buffers sufficient to absorb future shocks.
Cabo Verde’s economic development model depends on remittances, external transfers, and development aid, so the country is vulnerable to external shocks. The government has adopted a Strategic Plan for Sustainable Development (2017–2021), which identifies priority sectors for economic diversification, such as tourism, agriculture, infrastructure, and light industry.
The government has financed its fiscal deficit through concessional loans from bilateral and multilateral lenders (about 75% of total public debt) and treasury bonds issued to commercial banks and other private creditors. Bringing down the high public debt (126% of GDP in 2017) and lowering the risk of external debt distress require sustained effort. Planned fiscal consolidation, especially privatizing nonperforming state-owned enterprises and creating public–private partnerships for large investment projects, could reduce debt vulnerabilities.
Income inequality and social exclusion remain critical. To increase productivity and address high youth and female unemployment, the government is currently supporting micro, small, and medium enterprises through business incubator grants and employability pilot projects.