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Country Brief

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Cape Verde: Country Brief

Country Overview

Cape Verde is an archipelago of 10 islands located off the west coast of Africa. The country has around 500,000 inhabitants and is located some 300 miles off the coast of Senegal and with 1,557 square miles.. While ethnically heterogeneous and a country of immigrants, Cape Verde is religiously and culturally homogenous.

Its location on the geographic band of the Sahel greatly influences its climate. Cape Verde has few natural resources and suffers from serious water shortages. These have been exacerbated by cycles of long-term drought that have contributed to significant emigration throughout Cape Verde’s history. It is believed that at least as many Cape Verdeans live abroad as on the islands. The Diaspora maintains close relations with the country, sending home remittances equivalent to around 9 percent of GDP in recent years.

With barely 10 percent of its surface as arable land and limited mineral resources, Cape Verde’s arid conditions and mountainous terrain place the country at a disadvantage for agricultural production and it is a net importer of food and fuel. However, Cape Verde’s tourism industry is developing and the government is making efforts to turn the islands into a trade and transport hub.

Economic Overview

In December 2007, Cape Verde achieved middle-income country status. Good governance, sound macroeconomic management, including strong fiscal discipline and credible monetary and exchange-rate policies, trade openness and increasing integration into the global economy, a responsible use of donor support, and the adoption of effective social development policies have produced impressive results throughout the Cape Verdean archipelago. Growth in real income per capita reached more than 5 percent during 2005-08, well above the average for Sub-Saharan Africa and for Small-Island States. 

Despite a robust and effective policy response, the expansion of Cape Verde’s economy suffered from the global financial crisis.  Real GDP growth declined from 8.6 percent in 2007 to 6.2 percent in 2008 and 3.6 percent in 2009 as the effects of the global financial crisis affected Foreign Direct Investment (FDI) and, to a lesser extent than originally feared, remittances. With a long record of fiscal prudence having created considerable fiscal space, the Government moved swiftly to address declining global demand for Cape Verdean exports and the contraction of international credit markets through a countercyclical fiscal impulse driven by a combination of tax cuts and an aggressive public investment program designed in part to stimulate domestic demand and avoid a deeper slump in domestic economic activity, while at the same time establishing the basis for more robust growth in the future.

In spite of constraints in the capacity of the state agencies to implement a very rapid expansion in investment and of the low domestic component of infrastructure financing dampening the multiplier effect of increased public investment on domestic activity, the strong fiscal impulse led to a recovery that is continuing strongly, with growth rebounding from 3.6% in 2009 to 5.4% in 2010 and a projected 5.6% for 2011 and 6.8% for 2012.

The economic recovery was primarily led by the tourism and construction sectors.  The Cape Verdean economy is dominated by the service sector—which represents 75 percent of GDP—and in particular by the tourism industry. In the last decade, tourism receipts grew at an average rate of 28 percent; and while the 2009 global crisis jammed the brakes in the sectors growth, in 2010, tourism services still contributed 25 percent to GDP with a recovery in the number of tourists, encouraged by lower prices. In the transportation sector, passenger arrivals and cargo activities have been robust. In addition, government infrastructure investments and a resurgent real estate market led to a substantial expansion in construction activities.

Fiscal and external balances worsened in 2010 as a result of the Government’s expansionary policies and the increase in capital goods imports related to its public investment program. In addition, as the Government increased its concessional borrowing to take advantage of the transitional period following Cape Verde’s achievement of MIC status, fiscal and external deficits in 2009-10 increased significantly. The Government’s overall fiscal deficit (including official transfers) reached 11 percent of GDP in 2010 (from 6.3 percent in 2009) and the external current account deficit reached15 percent in 2009-2010. The rapid increase in fiscal and external deficits has raised concerns regarding their long-term sustainability.  Cape Verde’s public debt-to-GDP ratio strongly increased from 63 percent of GDP in 2008 to 68 percent of GDP in 2010 and it is expected to reach 75 percent in of GDP in 2012. However, as most of this debt is highly concessional and on terms longer than 10 years, debt-service ratios remain manageable.

Monetary policy was conducted in a manner consistent with the maintenance of the exchange rate peg to the Euro. Inflation in Cape Verde has remained primarily supply-driven and prices increased sharply in 2008 mainly as a result of the rising cost of imported food and fuel. As import prices fell , consumer price inflation dropped to just 1.0 percent in 2009 (from 6.8 in 2008), then increased slightly in 2010 to 2.2 percent and with the renewed rise in global food and fuel prices, the projection for 2011 is 4.4 percent.

Political context

Cape Verde has recorded important political gains during the last decades and is recognized as one of the most open countries in Sub-Saharan Africa.  Cape Verde currently ranks among the top performers in the World Bank’s Country Policy and Institutional Assessment (CPIA) for Africa. The country became independent in 1975, together with Guinea-Bissau on the African mainland. Following a coup in Guinea-Bissau, Cape Verde separated in 1980. Until 1991 it functioned as a single party state. Since then it has had democratically elected governments with regular elections. Since the adoption of a multi-party system in 1991, power has changed hands regularly and peacefully: The Partido Africano da Independência de Cabo Verde (PAICV), which ruled the country from independence until 1991, regained power in January 2001. The Movimento pela Democracia (MpD) carried the 2004 March local elections, but. in January 2006, the PAICV again won a majority in the legislative election, and in February of the same year Pedro Pires was confirmed as Cape Verde’s president. In May 2008, the MPD swept to victory again in municipal elections, winning control of eleven municipalities (as compared to the PAICV's ten), including the country's three largest: Praia and Santa Catarina (on Santiago island) and São Vicente.

On February 6th, 2011, Prime Minister, Jose Maria Neves, won a third term in office with 52.4 percent of the total vote; the PAICV won 37 of the 72 seats of the National Assembly to retain an absolute, albeit slightly reduced, majority. The main opposition party, MpD took 33 seats. The new administration was sworn in on March 21, 2011.With more than one-third of the sitting Ministers being replaced; although the economic policy team, has remained in place.

On August 21, opposition candidate Jorge Carlos Fonseca secured 54.45 percent of the vote to defeat the ruling party’s flag-bearer Manuel Inocêncio Sousa to become the 4th President of Cape Verde since independence.

Development Challenges

Cape Verde’s developmental challenges, as identified in the five pillars of its second Growth and Poverty Reduction Strategy, revolve around promoting effective governance, strengthening human development, addressing structural and social challenges from competitiveness, investing in infrastructure and enhancing social cohesion.

Rapid growth since the early 1990s has sharply reduced poverty in Cape Verde, although inequality remains high. According to the Bank’s latest poverty update, the share of the population in absolute poverty decreased from 49 percent in 1988 and 89 to 37 percent in 2001 and 2002 to 27 percent in 2007 and is estimated at 24 percent in 2010. This is an important achievement, driven by rapid growth in real income per capita. At the same time, inequality rose sharply during the 1990s and has remained high since then, with a Gini coefficient for consumption of 0.49 in 2007. Progress in reducing poverty has been slower in rural areas, where 72 percent of the poor live and where 30 percent of the population lives in absolute poverty, compared to 12 percent of the urban population. It has also varied across islands . The islands with the largest rural populations (Santo Antão, Santiago, São Nicolau and Fogo) have experienced the highest rates of poverty and food insecurity. 

The sharp reduction in poverty since 1990 has been complemented by significantly increased access to education and health care. The net primary enrollment rate in elementary education rose from 72 percent in 1990 and 1991 to 95 percent in 2005 and 2006, while net secondary enrollment reached nearly 60 percent in 2005 and 2006. Adult literacy rates are high (approximately 84 percent in 2008, 97 percent among the youth), and Cape Verde has now achieved parity for girls and boys in school enrollment. Infant mortality has been reduced from 45 to 24 per 1,000 live births since 1990, maternal mortality has also declined as births attended by skilled health personnel have risen rapidly from 54 percent in 1995 to around 90 percent, and life expectancy at birth (71 years) is the third highest in Africa.

At the same time, Cape Verde faces important social challenges with unemployment among vulnerable groups. Though the proportion of the labor force unable to find formal work fell fairly steadily during the decade to 2008, unemployment rose again slightly in 2009 to 13.1 percent (20.9 percent per the earlier methodology for measuring unemployment), and remains significantly higher among youth, women and rural populations, more over there are sharp differences across islands, reflecting a misalignment between skills and job opportunities and constraints in domestic migration, even though there has been significant movement towards urban areas that has put pressure on basic services. 

Cape Verde is on track to achieve most of the Millennium Development Goals (MDGs) by 2015. The country currently ranks 118th out of 169 countries in the UNDP Human Development Index.

 

World Bank Assistance/Engagement

As of August 31, 2011, the World Bank has approved 34 projects for Cape Verde amounting to about US$316 million, of which US$296 million has been disbursed. Of the 34 projects, 31 projects have now closed, and the current portfolio comprises of three active projects --including one Regional project -- with total commitments of US$42.5 million. These projects are for: (a) SME Capacity Building and Economic Governance (b) Road Sector Support, and (c) West Africa Regional Fisheries.

A Country Partnership Strategy 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 is 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: (a) promote good governance and public sector capacity; (b) improve competitiveness and the investment climate for private sector-led growth, and (c) strengthen human capital and social inclusion. In addition, grant funded for statistical capacity building in the amount of US$287,000 was approved in July 2011. A Country Partnership Strategy Progress Report (CPSPR) was disclosed in January 2011 reviewing the relevance of the Country Partnership Strategy (CPS) and providing an update on the country context and the evolution of key risks, progress to date under the CPS and the adjustments that are proposed in the country program.

With an estimated GDP per capita of $3,100 in 2010 and based on a creditworthiness analysis, Cape Verde is considered as a lower middle-income country and therefore eligible for IBRD resources. For the first time, a proposed envelope of $55 million equivalent in IBRD resources is available for investment projects under the new Strategy, although Cape Verde will also continue to enjoy access to IDA resources as a blend country.
In recent years, analytical work has included a full Public Expenditure Review, an Investment Climate Assessment, an Infrastructure Diagnostic, a Fisheries Sector Review and a Financial Sector Assessment. The Bank’s most recent analytical work in FY10 included a Debt Management Performance Assessment and a Labor Market Assessment.

A rich agenda of technical support is planned for FY12, including a public expenditure and financial management and financial accountability report in partnership with the African Development Bank, European Union and Spanish Cooperation; a report on the observance of standards and codes for accounting and auditing; a review of higher education; an air transport diagnostic; an analysis on linkages in the value chain to ensure pro-poor tourism, as well as a Country Economic Memorandum. Moreover, work will begin on non-lending technical assistance to strengthen the Public Investment Program and will be completed in FY13.     

International Finance Corporation (IFC)

IFC’s strategy in Cape Verde is focused on selective investments in financial markets, telecommunications and tourism sectors. In addition, IFC will provide support as requested by Government on improving the investment climate with a view to attracting investors to strategic sectors (tourism, energy, financial markets and agribusiness).  As of February 2011, IFC’s portfolio in Cape Verde amounted to US$4.0 million, of which US$2.20 is outstanding.  Forthcoming IFC projects/programs relate to financial markets: in the financial sector, IFC is discussing its Global Trade Finance Program with one bank and two other banks are interested in a risk-sharing facility to support their SME lending.

Multilateral Investment Guarantee Agency (MIGA)

MIGA does not have any exposure resulting from investments in Cape Verde. However, MIGA is well advanced in its consideration of an engagement in a large wind-farm project in Cape Verde at this time and is providing advice on how to structure the related public-private partnership. This renewable energy project is complementary to the IBRD’s support for strengthening fuel-based generation capacity and the management of the sector.

World Bank Institute (WBI)

Cape Verde has not been an active participant in WBI programs to date. However, where relevant, participants have been invited to attend regional activities.

 

HIV/AIDS Project

Bank support for Cape Verde’s efforts to fight HIV/AIDS began in 2002 as a result of a request by government authorities. At the time, there was insufficient donor attention to the issue and the country had inadequate resources to address the epidemic. 

The objectives of the Bank supported HIV/AIDS project that closed in 2009 were to assist Cape Verde in reducing the spread of HIV/AIDS in its population, mitigate the health and socioeconomic impact of HIV/AIDS on persons infected with or affected by HIV/AIDS within the country’s territory, thus sustaining an economically productive population, and building strong and sustainable national capacity to respond to the HIV/AIDS pandemic.

At the completion of the project, there was a consensus that the project had indeed had a significant impact on transforming the discussion of HIV/AIDS from a taboo subject to a national issue. The project also helped strengthen certain key institutional changes by making the national HIV/AIDS program multi-sectoral and mainstreaming HIV/AIDS activities into the action plan of every government agency. It ensured a participatory national HIV/AIDS program with private sector (for-profit and not-for-profit) participation and community empowerment, expanded the national capability from a small unit within the Ministry of Health to a range of public and private sector entities at national, municipal, and local levels.   These results have translated into a decline in HIV prevalence and greater public awareness as reflected in a sharp rise in reported use of prophylactics among young men and women.

Growth and Competitiveness Project

The overall objective of the Growth and Competitiveness Project was to broaden the base of private participation in Cape Verde's economic growth, enhance private sector competitiveness and further develop its financial sector. To this end, through the project components the financial sector was to be strengthened, and restructured, namely through the financial sector reform, which includes reform of the pension system. Private sector competitiveness was to be enhanced by supporting reforms within the legal system, as well as tax reforms, and alleviating the administrative barriers. The focus was on capacity building of selected Government ministries, and agencies that interact with private firms, namely to improve institutional capabilities, and business delivery.

As a result of the project, impressive progress was made in the areas of investment climate and regulatory capacity. In the financial sector, the combined efforts of the Government, the Central Bank of Cape Verde, the commercial banks and the Chambers of Commerce have substantially strengthened the financial system, expanded the availability of financial products and significantly deepened the financial market.  Substantial gains have also been achieved with respect to pension reforms.

Road Sector Support

The objective is to enhance Cape Verde’s road sector management, by supporting institutional reform of the road sector and improved functioning of related civil works markets, and by ensuring better access to social and economic opportunities due to improved mobility for affected populations.  The project is performing very well with works having been completed more than a year ahead of project closing. These include the completion of road construction on São Vincente (Salamansa-Norte de Baia), Maio (Alcatraz-Figueira da Horta) and São Nicolau (Ribeira Brava-Tarrafal road).  As a result, the asset value of the national road network has been increased by around 15 percent to more than ECV 600 billion.  Sustainability is likely to be assured via regular maintenance funded via a newly established Road Maintenance Fund, which is financed by a road maintenance (fuel) levy that went into effect in 2009. Additional financing in the amount of US$10million was approved for the transport sector in April 5, 2011.  

Other Development Partners

Cape Verde's major traditional bilateral donors are Portugal, the USA, Luxembourg, the Netherlands, and Austria. The European Union, Africa Development Bank, United Nations, World Bank and IMF are the major multilateral partners. Cape Verde is strengthening South-South cooperation, especially with Brazil and China, in order to take advantage of its privileged strategic position for cross-Atlantic trade. In 2007, China designated Cape Verde as one of six Special Economic Areas.

Budget support in Cape Verde has been catalytic for donor harmonization around key policy measures and results. A Budget Support Group (BSG) was created in 2005. Seven donors are now part of the BSG, and have signed the Memorandum of Understanding “Partnership Framework between Budget Support Partners and the Government of Cape Verde for the provision of Budget Support”.  The Group consists of the African Development Bank, the European Commission, Portugal, Luxembourg, the Spanish Agency of International Development for Cooperation, and the World Bank. These donors conduct joint reviews twice a year (most recently in May 2011), which allow for consensus-building and lower transaction costs for the Government. The Government and donors have developed a joint, streamlined matrix, which is used as a basis for discussions and disbursement in the donors’ respective operations. 

In view of Cape Verde’s graduation to middle-income status in December 2007, the Government set up a Government and donor support group to help ensure a smooth transition to middle-income status. In June 2007, the group adopted a declaration of support for “a long-term international effort to support Cape Verde’s socioeconomic transformation agenda through increasing market access, facilitating new forms of financing, and providing continued support for poverty reduction programs and to reduce Cape Verde’s vulnerabilities.”

 

Last updated September 2011




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