The pace of economic recovery is subject to substantial downside risks associated CABO VERDE Key conditions and with rising uncertainty in Europe due to the Ukraine conflict, the emergence challenges of new COVID-19 variants, and climatic shocks. Fiscal risks are high as the gov- Table 1 2021 Political stability, democratic institutions, ernment is exposed to contingent liabil- Population, million 0.6 and pro-market reforms have generated ities in sectors that are particularly vul- GDP, current US$ billion 1.9 significant economic and social progress nerable to the crisis, such as aviation, GDP per capita, current US$ 3363.6 since independence in 1975. However, ports, and utilities. A sustained Ukraine a 3.4 International poverty rate ($1.9) Cabo Verde’s development model, based war could reduce investments and a 15.4 on tourism and foreign direct investment tourism flows and trigger fiscal liabilities. Lower middle-income poverty rate ($3.2) a 41.3 (FDI) has shown signs of fatigue since the Moreover, Cabo Verde remains highly ex- Upper middle-income poverty rate ($5.5) Gini index a 42.4 2008 Global Financial Crisis. The subse- posed to natural disasters such as vol- School enrollment, primary (% gross) b 100.9 quent sluggish recovery in Europe re- canic eruptions, droughts, floods, and ris- b 73.0 duced the influx of funds, with dwindling ing sea levels that could further weigh on Life expectancy at birth, years private investment and growth. Ineffective external and fiscal balances. Total GHG Emissions (mtCO2e) 0.8 expansionary fiscal policy between Source: WDI, Macro Poverty Outlook, and official data. 2010-2015 led to growing fiscal financing a/ Most recent value (2015), 2011 PPPs. b/ Most recent WDI value (2019). needs and to put public debt back on a sustainable path, the authorities initiated a Recent developments consolidation program in 2016, including Growth rebounded to 7.1 percent in the reform of loss-making state owned en- Economic activity is estimated to have ex- terprises (SOEs). panded by 7.1 percent in 2021, magnified 2021, led by the gradual recovery in The COVID-19 crisis reversed the progress by base effects after a contraction of 14.8 tourism, supporting poverty alleviation. in fiscal consolidation and exacerbated the percent in 2020. Growth was led by a slight Inflationary pressures increased, driven growth model’s vulnerabilities. In addi- recovery of tourism from the second quar- by energy and food. Growth-friendly fis- tion to the adverse economic effects of mit- ter. Retail and wholesale trade, construc- igation measures, global travel restrictions tion, and public administration were the cal consolidation should see growth con- led to a sharp contraction in tourism and main contributors of growth. On the de- verging to 6 percent and put debt-to- related activities. The authorities respond- mand side, public consumption and net GDP on a declining path over the medi- ed by expanding public health services exports were the main drivers. um term. The outlook is subject to sub- and social protection programs, as well as The current account deficit (CAD) is esti- stantial downside risks stemming from by providing financial support to small mated to have declined from 15.9 percent of businesses. However, poverty reduction GDP in 2020, to 14.2 percent in 2021, sup- new COVID-19 variants, the Ukraine gains made since 2015 were reversed in ported by an increase in remittances and the crisis, and climatic shocks. 2020 driven largely by substantial tempo- moderate recovery in services exports. The rary job losses, particularly in the tourism CAD was financed by concessional loans sector. The unemployment rate increased and FDI. International reserves reached 6.9 from 11.3 to 14.5 percent in 2020. months of prospective imports. FIGURE 1 Cabo Verde / GDP per capita and debt outlook FIGURE 2 Cabo Verde / Actual and projected poverty rates and real GDP per capita Percentage of GDP Billions, CVE Poverty rate (%) Real GDP per capita (constant LCU) 240% 240 60 350000 215 215% 200 300000 50 182 190% 160 250000 40 165% 120 200000 154.9 157.1 153.1 147.1 30 140.8 150000 140% 80 124.7 124.1 20 116 100000 115% 110 40 104 100 98 10 50000 90% 0 2018 2019 2020 2021e 2022f 2023f 2024f 0 0 Public Debt: Post-COVID-19 forecast (lhs) 2007 2009 2011 2013 2015 2017 2019 2021 2023 Public Debt: Pre-COVID-19 forecast (lhs) International poverty rate Lower middle-income pov. rate Real GDP per capita: Post-COVID-19 forecast Upper middle-income pov. rate Real GDP pc Sources: World Bank and IMF staff estimates. Note: Pre COVID-19 GDP forecast Source: World Bank. Notes: see table 2. refers to the 2019 Annual Meetings Macro-poverty Outlook. MPO 1 Apr 22 The fiscal deficit is estimated to have nar- in poverty. The extreme poverty rate fell Inflation is projected to converge to 2 per- rowed slightly to 9.5 percent of GDP in slightly from 2.4 percent to 2 percent. cent over the medium-term. 2021, driven by sustained high current ex- The CAD is projected to reach 11.8 percent penditure (33.8 percent of GDP). Financing of GDP in 2022, falling to 6.7 percent by needs of 8.8 percent of GDP were covered 2024 driven by the rebound in service ex- by concessional credits, grants, domestic Outlook ports. Medium-term external financing borrowing, and resources freed up by the needs are expected to be covered mainly Debt Service Suspension Initiative. Public Real GDP growth is projected to reach by FDI, which is expected to reach 5.3 per- debt as a share of GDP increased slightly to 5.5 percent in 2022 (4.4 percent in per cent of GDP in 2024. International reserves 157.1 percent of GDP, driven by increased capita terms), driven by the continued re- are expected to remain strong, at 6 to 7 domestic debt, and remains sustainable, covery of the tourism sector. The Ukraine months of imports. but the risk of external and total debt dis- crisis will weigh on growth, mainly The authorities are committed to gradual tress is high. through increasing oil and food prices. fiscal consolidation over the medium term, Cabo Verde’s monetary policy is aligned Over the medium term, private con- which includes enhanced management of with the Eurozone, as the escudo is pegged sumption and investment in tourism and fiscal risks, notably from SOEs, and rev- to the euro. Inflationary pressures in- the blue economy will be the main con- enue mobilization. The primary fiscal creased in 2021 due to higher international tributors to growth. The outlook is sub- deficit is projected to decline to 8 percent of oil and food prices. Average headline in- ject to substantial downside risks stem- GDP in 2022. Fiscal consolidation and pru- flation rose from 0.6 percent in 2020, to ming from climate shocks, new dent borrowing policies should reduce the 1.9 percent in 2021. Food inflation, which COVID-19 variants, the realization of public debt-to-GDP ratio to 140.8 percent stood at 0.6 percent, affected dispropor- contingent liabilities, increased global un- by 2024. tionally the poor as the bottom forty per- certainty due to the Ukraine war, and de- The poverty rate (based on the lower- cent of the population spends about 34 lays in SOE reforms. middle income poverty line of US$3.2 a percent of their income on consumption. Inflationary pressures are expected to peak day, 2011 PPP) is projected to decline to The rebound in economic activity in 2021 in 2022, reaching 3.5 percent, reflecting the 10.6 percent in 2022 and 8 percent by resulted in a reduction in the poverty stress on global value chains and the im- 2024. Poverty reduction will be supported rate from 14.7 percent to 12.3 percent (us- pact of the Ukraine war. Inflation is expect- by growth, mainly in the tourism sector, ing $3.2 US per day PPP in 2011), re- ed to start stabilizing in 2023 as supply dis- and the stabilization of inflation over the flecting nearly 12,000 fewer people living ruptions abate and energy prices stabilize. medium term. TABLE 2 Cabo Verde / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 5.7 -14.8 7.1 5.5 6.1 6.0 Private Consumption 5.9 -11.3 3.9 2.3 3.4 3.0 Government Consumption 4.8 0.8 7.5 2.3 2.5 1.7 Gross Fixed Capital Investment -6.3 19.7 11.2 12.5 10.4 10.6 Exports, Goods and Services 8.7 -58.4 8.4 22.4 13.4 12.7 Imports, Goods and Services 0.8 -22.5 7.4 13.6 9.1 8.8 Real GDP growth, at constant factor prices 5.7 -14.8 7.1 5.5 6.1 6.0 Agriculture -6.8 -6.3 8.1 4.5 2.9 2.6 Industry 7.5 -2.0 10.3 6.4 6.3 5.6 Services 6.3 -19.2 5.9 5.3 6.3 6.5 Inflation (Consumer Price Index) 1.1 0.6 1.9 3.5 2.3 2.0 Current Account Balance (% of GDP) -0.4 -16.5 -13.5 -11.8 -7.0 -6.7 Net Foreign Direct Investment (% of GDP) 4.2 3.7 5.8 2.6 4.2 5.3 Fiscal Balance (% of GDP) -2.4 -10.0 -9.5 -8.0 -7.1 -5.9 Debt (% of GDP) 124.1 154.9 157.1 153.1 147.1 140.8 Primary Balance (% of GDP) 0.2 -7.1 -7.0 -4.8 -3.6 -2.2 a,b International poverty rate ($1.9 in 2011 PPP) 2.0 3.1 2.4 2.0 1.6 1.4 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) 10.2 14.7 12.3 10.8 9.2 8.0 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 32.5 41.1 37.0 34.2 31.2 28.7 GHG emissions growth (mtCO2e) 2.5 2.2 2.1 2.5 2.4 1.5 Energy related GHG emissions (% of total) 87.5 88.1 88.7 88.9 89.1 90.1 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on 2007-QUIBB, 2019-, and 2015-IDRF. Actual data: 2015. Nowcast: 2016-2021. Forecasts are from 2022 to 2024. b/ Projection using point-to-point elasticity (2007-2019) with pass-through = 1 based on GDP per capita in constant LCU. MPO 2 Apr 22