Documentof TheWorld Bank FOR OFFICIAL USEONLY ReportNo. 47750-CV INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF CAPEVERDE FOR THE PERIOD FY09-12 March25,2009 CountryDepartmentfor CapeVerde (AFCF1) Africa Region r This document has a restricteddistributionand may be usedby recipients only inthe performanceof their official duties. Itscontentsmay nototherwisebe disclosedwithout World Bankauthorization. The previousCountryAssistance Strategy for CapeVerde (ReportNo. 30941-CV) was discussed by the BoardonFebruary22,2005 CURRENCY EQUIVALENTS (as of March 20,2009) Currency Unit:Cape Verdean Escudo CVE 125.48 = lSDR CVE 109.69=l.OO (Peg) CVE 85.16 =US$l.OO 1 SDR=US$1.47 FISCALYEAR January 1-December 31 ACRONYMS AND ABBREVIATIONS .. 11 FOROFFICIAL USE ONLY DNSI National Directorate for Statistics and Information Technology DPL Development Policy Loan DSA DebtSustainability Analysis DTIS Diagnostic Trade Integration Study EC EuropeanCommission ECOWAS Economic Community o f West Afiican States EDF European Development Fund ENAPOR IIEmpresaNacional deAdministrap70 dos Portos (National Enterprise for Port MIGA Multilateral InvestmentGuarantee Agency MSME Micro, Small and MediumEnterprises MTEF Medium-TermExpenditure Framework NCDs Non-Communicable Diseases NOS1 Nzicleo Operacional da Sociedadede InformapTo (Operational Nucleus for the This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Operatorsof Cape Verde) USD UnitedStates Dollar VAT Value-added Tax WTO World Trade Organization 1- WorldBank ~ Vice President: ObiageliK.Ezekwesili (AFRVP) Country Director: Habib Fetini(AFCF1) Task Team Leaders: Sybille Crystal (AFCSN) McDonald Benjamin (AFCSN) ACKNOWLEDGEMENTS The World Bank Group greatly appreciates the close and fruitful collaboration with the Government of CapeVerde inthe preparation o fthis Country Partnership Strategy. The preparation of this CPS was a team effort by the World Bank Group's Cape Verde Country Team. Many team members made substantial contributions by drafting parts of the document, participating in review meetings and providing comments and advice. Special thanks go to Joelle Dehasse, CPS task team leader until July 2008 and author of the CAS Completion Report; Manuela Francisco, Senior Economist for Cape Verde, who greatly supported the team duringthe preparation of the CPS; Clara Ana Coutinho de Sousa, acting Senior Economist for Cape Verde since January 2009; Zeze Weiss, Senior Social Development and Civil Society Specialist, who carried out the CPS consultations, and Harifera Raobelison and Danette Metcalfe, who edited and finalized the Board package of the CPS. iv THE REPUBLIC OF CAPEVERDE COUNTRY PARTNERSHIP STRATEGY TABLE OF CONTENTS EXECUTIVE SUMMARY vii I.INTRODUCTION 1 11. COUNTRY CONTEXT 1 2.1 GEOGRAPHIC, HISTORICAL POLITICALCONTEXT AND 1 2.2 POVERTYAND SOCIAL CONDITIONS 2 2.3 RECENTECONOMICDEVELOPMENTS 4 2.4 MEDIUM TERMOUTLOOKAND SUSTAINABILITY 5 111.KEY DEVELOPMENTCHALLENGESAND OPPORTUNITIES 8 3.1 PROMOTINGEFFECTIVEGOVERNANCE 8 3.2 STRENGTHENING HUMAN DEVELOPMENT 10 3.3 ADDRESSING STRUCTURAL AND SECTORAL CHALLENGES FORCOMPETITIVENESS 10 3.4 INVESTING ININFRASTRUCTURE 13 3.5 ENHANCINGSOCIAL COHESION 17 IV. CAPE VERDE' S DEVELOPMENT STRATEGYAND PRIORITIES 18 4.1 CAPEVERDE'S VISION OF ECONOMIC TRANSFORMATION 18 4.2 CAPEVERDE'S GROWTH AND POVERTYREDUCTIONSTRATEGY FOR 2008-1 1 19 4.3 CAPEVERDE'S INTEGRATION INTHE GLOBALECONOMY 20 V. WORLD BANK GROUPCOUNTRY PARTNERSHIPSTRATEGY 20 5.1 LESSONSLEARNED KEY PRINCIPLESFORTHENEW PARTNERSHIPSTRATEGY AND 20 5.2. CPS OBJECTIVES AND STRATEGIC PRIORITIES 21 5.3 DELIVERING CPS PROGRAM THE 28 5.4 IFC AND MIGA ACTIVITIES 30 5.5 PARTNERSHIPSAND HARMONIZATION WITH DONORS 30 VI. COUNTRYMONITORINGAND EVALUATIONAND RISKMANAGEMENT 32 6.1 MONITORING EVALUATINGTHEBANK'SPORTFOLIO AND 32 6.2 MONITORING EVALUATINGRESULTS AND 32 6.3 MAINRISKSAND MITIGATINGMEASURES 32 VII. CONCLUDINGREMARKS 34 List ofTables Table 1: Trends inPoverty in Cape Verde between 2001and 2007 3 Table 2: Basic Macroeconomic Indicators, 2004- 12 6 Table 3:Indicative IDA and IBRDFinancing Envelope and Program for FY09-12 29 Table 4: Indicative Knowledge Program for FY09-12 29 Table 5: Estimated Joint Budget Support for Cape Verde, 2008-1 1 31 Table 6: Development Partners and Current Areas of Intervention 31 V List of Fipures Figure 1:Productivityper Worker andRatioof Costto Output per Worker 12 ListofBoxes Box 1:Electra's InstitutionalandOperationalChallenges 14 Box 2: CapeVerde's Economic TransformationStrate-gy 19 Listof Amendixes Country Specific appendixes Appendix 1:CPS ResultsMatrix 35 Appendix2: CAS Completion ReportFY05-08 40 Appendix 3:Joint World Bank-FundDebt SustainabilityAnalysis 73 Appendix4: ConstraintsReportedby Enterprises-CapeVerde andICA Comparator Countries 88 Appendix5: PovertyMap 89 Appendix6: DevelopmentPartnersandCurrent Areas ofIntervention 91 Appendix7: CPS Consultations onthe Country Partnership Strategy 92 Appendix 8: MillenniumDevelopmentGoals 95 StandardCPSAnnexes CapeVerde at a Glance 97 CPS Annex B2: SelectedIndicatorsof BankPortfolioPerformanceandManagement 100 CPS Annex B3: IBRDADAProgramSummary 101 CPS Annex B3:IFCProgram,FY05-09 102 CPS Annex B4: Summary ofNon-lendingServices 103 CPS Annex B5: SocialIndicators 104 CPS Annex B6:KeyEconomic Indicators 105 CPS Annex B7:KeyExposureIndicators 107 CPS Annex B8: IFCCommittedandDisbursedOutstandingInvestmentPortfolio 108 CPSAnnex B8:OperationsPortfolio(IBRDADA andGrants) 109 MapNo. IBRD33383 vi EXECUTIVE SUMMARY 1. Background. This FY09-12Country Partnership Strategy for Cape Verde sets out the proposed financial and technical support of the World Bank Group in line with development prioritiesestablished by the country's Authorities in their SecondGrowth and Poverty ReductionStrategy Paper for 2008-11. Since CapeVerde graduatedto MiddleIncomeCountry status in January 2008, this will be the first Bank strategy that treats CapeVerde as an IBRD-IDAblendcountry. ii. Country Context. Cape Verde is a small archipelago with a stable democratic system. It achieved annual real economic growth of seven percent per year during the 2004-07 period, to reach a GNI per capita estimated at US$2,380 for 2008, and reduced poverty by 10 percentage points to 27 percent, due largely to strong economic management. Nonetheless, the economic slowdown in Europe affected economic performance in Cape Verde in the second half of 2008, due to a decline in foreign direct investment, tourism and remittances flows that impactednegativelyon Cape Verde's growth. The medium-term outlook is subject to a number of further significant downside risks. The fiscal position could be undermined if the financial situation of Electra, the electricity and water utility, does not improve and iflarge public investmentsprogramsare not well managed.CapeVerde's strongtrack record of macroeconomic management and solid structural reforms augur well for its willingnessto take prompt and difficult decisionsthat helpmitigatethe effects ofthe current globalfinancialturmoil. iii. Country Priorities. Cape Verde's overarchingvision is to achieve economic transformation based on its geo-strategic, natural and cultural assets, notably as a hub for transshipment, offshore financial and other services and tourism. These priorities are the foundation for its GPRSP-I1 for 2008-11, which focuses on the following five pillars: public sector governance; human capital development; competitiveness; infrastructure;and social cohesion.Cape Verde has set ambitious goals to boost economic growth and reduce unemployment under the GPRSP-I1that will be hampered by the global financial crisis, given the country's vulnerability to decreases in tourism, remittances and foreign direct investment. iv. Bank Program and Instruments. The Bank's overarching objective for this CPS is to help the Government sustain high levels of growth and reduce unemployment, poverty and inequality. The proposedBank strategy aims to provideselective, demand-drivenassistance that deepensthe CapeVerde- Bank partnershipinthree key areas that constitute the pillarsof the CPS: (1) promotinggood governance and public sector capacity; (2) improvingcompetitiveness and the investment climate for private sector- ledgrowth; and(3) strengtheninghumancapitaland social inclusion. Moreover, inthe same way as Cape Verde is pursuing a broader transformation agenda, the World Bank Group aims to transform its relationshipwith Cape Verde over the periodof the Strategy. This will involvea much broader menuof financial and technical support than in the past, ranging from the ongoing IDA, AAA and trust fund support to includeIBRD lending; an expandedIFC program; MIGA and IBRD guarantees; new hedging products; specialized technical assistance, for example on debt management; and facilitation of South- SouthExchanges. v. The Bank will concentrate its financialresources in selected areas within the three pillars of the CPS so as to achieve transformativechange. This impliesfocusing resources in a sector over time until a transformation point is reached beyond which the sector is elevated irreversibly to a higher functioning level. For example, the full IBRD envelope of US$52.8 million will be assigned to the critical energy sector and build on previous assistance in that sector in order to support decisive change. The PRSC series of around US$10million per year over four years will focus on governance and competitiveness reforms and build on the previous PRSCs and the ongoing Growth and Competitiveness operation in order to reinforce this priority area. New IDA-andGEF-financed investment projects totaling US$13 million over the next four years will also address governance and competitiveness reforms, as well as bolster support through the ongoingRoad Sector operation so as to achieve transformative change via continuingand enhanced support to the transport sector. The program of lendingwill moreover seek to vii promote social inclusioneven as it supports higher growth and efficiency. It buildson an existing, well- performing portfolio of three operations totaling US$48.5 million that is well-aligned with the CPS objectives. Non-lendingsupport during the CPS periodwill cover core diagnostics and include policy notesthat provideflexibleand rapidresponsesto Government on key issues. Capacity enhancementwill be an integral part of Bank support and to this end, the Strategy will draw on trust fund resources and specialized skills withinthe Bank. The Bank's programwill also continue to be coordinated closely with donor partners, notably partners in the Budget Support Group that engages injoint policy dialogue with Governmenton budget support. vi. IFC and MIGA. The Strategy provides a framework for the participationof IFC and MIGA, especially to support the development of privateparticipationin infrastructure. IFC's current investment portfolio in CapeVerde is limited,with a total ofUS$8 million ininvestments inthe telecommunications and banking sectors. Looking ahead, IFC will focus on opportunitiesto improve financing options for SMEs in Cape Verde, and public-privateinfrastructure projects, notably in telecommunications. IFC's PEP-Africa program, in coordinationwith IDA, has prepared studies on key sectors for the economic transformationagenda. MIGA does not have any exposure in Cape Verde at present, but is preparedto provide guarantees for private sector-led investments in infrastructureas well as technical assistance on structuringsustainable public-privatepartnerships. vii. Risks. The first main risk relates to the medium-termeffects on Cape Verde of the ongoing international financial crisis and the global economic slowdown. Cape Verde is highly exposed to external risks in light of its open economy and its dependence on tourism receipts, remittances, donors financing and foreign direct investment. The difficulty in predictinga turnaround in the global context heightensthese risksfurther andmakesit difficult to gaugethe amplitude and duration of adverse effects. A preliminarysensitivityanalysis indicatesthat adverse external shocks wouldhavemorenegative effects on growththan on fiscal and external balances, due to self-stabilizingfeatures in these accounts. Factors that mitigate the risks related to the global crisis include Cape Verde's build-up of sizable international reserves in recent years; its standing line of credit with the Central Bank of Portugal; its continued monitoring under the IMF PSI, its access to budget support from the Budget Support Group of donors, includingthe Bank, and the country's solid track record of proactiveeconomic management and timely adjustmentto shocks. The forthcomingPoverty Assessment will simulate the poverty impact of potential shocks across different groups so as to identify additional mitigationmeasuresfor vulnerable groups. If unpredictable negative developments warrant it, an early CPS Progress Report is envisaged so as to ensure flexibility and timely adjustments in the Bank's response. The second mainrisk is that the next Presidentialelections will take place early in 2011 and the timing of more difficult institutionalreforms will need to take this into consideration. The third main risk is that the Government faces a range of contingent liabilities related to public or semi-public companies either not operating efficiently or being affected by the economic downturn. The Bank will provide support that directly addresses the financial position of the most prominent of these risks, namely Electra. A fourth risk is that shortcomings in administrativecapacity could affect the implementation of the GPRSP-I1and reforms supported by the Strategy. To this end, the Bank and other donors are financing a combination of capacity-building activitiesand technicalsupport. The fifth mainrisk is that, with Cape Verde's graduationto MIC status inJanuary 2008, donors may beginto withdraw concessional aid at a faster pacethan foreseen. The Bank will seek to moderatethis risk by supportingCape Verde's continued accessto concessionalfinancing as an IDNIBRDblendcountry andby encouragingdonor partnersto do the same. viii. Inits discussion ofthe CPS, the Boardmaywishto considerthe followingissues: 0 Does the CPS adequately address keydevelopmentprioritiesfor CapeVerde? 0 Does the CPS adequately address risks, notablyinthe context of the globaleconomic slowdown? 0 I s the policy, institutionalandresultsframework underpinningthe CPS appropriate? ... Vlll I.INTRODUCTION 1. This Country Partnership Strategy (CPS) for FY09-12 sets out the proposed financial and technical support of the World Bank Group (WBG) in linewith developmentpriorities established by Cape Verde's Authorities. Cape Verde's overarching vision is that o f achieving economic transformation on the basis of its geo-strategic, natural and cultural assets, notably as a hub for transshipment, offshore financial and other services and tourism. These priorities are the foundation for its Second Growth and Poverty Reduction Strategy Paper (GPRSP-11) for 2008-2011, which focuses on the same five pillars as the earlier GPRSP through 2008, namely public sector governance, human capital development, infrastructure, competitiveness and social cohesion. Cape Verde achieved annual real economic growth of seven percent and reduced poverty by 10 percentage points duringthe previous CAS period through strong economic management. It has set ambitious goals to boost economic growth and reduce unemployment under the GPRSP-I1that will be hampered by the global financial crisis, given the country's vulnerability to declines in tourism, remittances and foreign direct investment. Supporting Cape Verde to maintain the impetus of reforms and consolidate its progress on a strong medium term development agenda through this crisis period will be a key challenge for the strategy. 2. Since Cape Verde graduated to Middle Income Country (MIC) status in January 2008, this will be its first Country Partnership Strategy as an IBRD-IDA blend country.' The Bank has enjoyed a strong and productive working relationship with CapeVerde and the Authorities have askedthe Bank Group to deepen its partnership in three key areas that constitute the pillars o f the CPS: (1) Promoting good governance and public sector capacity; (2) Improving competitiveness and the investment climate for private sector-led growth, and (3) Strengthening human capital and social inclusion. The Bank will concentrate its financial resources in selected areas within these pillars so as to support Cape Verde in pursuing a broader transformation agenda. Moreover, the WBG aims at transforming its relationship with Cape Verde over the CPS period. This will involve a considerably broader menu of technical and financial support than in the past, ranging from the ongoing IDA, AAA and trust fund support to include IBRD lending; an expandedIFC program; MIGA and IBRDguarantees; new hedgingproducts; specialized technical assistance, for example on debt management; and facilitation of South-South Exchanges. This program of support would be implemented in close coordination with donor partners. 11.COUNTRYCONTEXT 2.1 GEOGRAPHICAL, HISTORICAL POLITICALCONTEXT AND 3. Cape Verde is a small archipelago of ten islands located off the west coast of Africa. The country has around 500,000 inhabitants and is located some 300 miles off the coast o f Senegal and is slightly larger than the State of Rhode Island with 1,557 square miles. 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, so that it is believed that around twice as many Cape Verdeans live abroad as on the islandsm3The Diaspora maintains close relations with ' As of January 2008, Cape Verde has graduated from the UNlist of Least Developed Countries. The country has not graduated from IDA and will continue to borrow from IDA under the Small States Exception. The most important natural resources are salt, pozolan (volcanic rock used incement production) and limestone. The population in Praia, the capital, is estimated at 106,052 and in Mindelo, the second largest city, at 67,844. Some 500,000 people of Cape Verdean ancestry live in the United States, mainly in New England. Portugal, France, Italy, Senegal and the Netherlands also have large Cape Verdean communities. 1 the country, sending home remittances equivalent to 9.2 percent of GDP in 2007. With barely 10 percent of its surface as arable land and with limited mineral resources, Cape Verde's arid conditions and mountainous terrain place the country at a disadvantage for agricultural production and it i s a net importer of food and fuel. 4. Cape Verde has recorded important political gains during the last few decades and is recognized as one of the most open countries in Sub-Saharan Africa. First colonized by Portugal in 1456, the islands were settled by refugees fleeing political and religious persecution in Europe, who in turn brought slaves from the African continent and developed a mestiqo (mixed race) culture, with influences from the cultural traditions of Europe, the Middle East and Africa-this cultural heritage has, for example, given rise to a rich and distinctive musical tradition. Cape Verde gained independence in 1975, and following a brief political union with Guinea-Bissau until 1980, charted its own course as a one-party state until constitutional reforms in 1991 brought about a peaceful transition to a multi-party democracy. Since then, Cape Verde has consolidated its democratic institutions and developed a strong track record of peaceful elections and transfers of power, a free and diverse press, and active civil society and grass-roots organizations. The Partido African0 da Independincia de Cab0 Verde (PAICV), which ruled the country from independence in 1975 until 1991, regained power in January 2001. The PAICV also obtained a new parliamentay majority in January 2006 and President Pedro Pires was reelectedfor a five-year term in February 2006. With the next presidential elections scheduled for February 2011, there i s a window of opportunity for major structural reforms in the early phase of implementation of the CPS before the country preparesfor the next general elections. 2.2 POVERTY AND SOCIAL CONDITIONS 5. Rapid growth since the early 1990s has sharply reduced poverty, although inequality remains high. The analysis of the latest three poverty surveys' suggests that the share of the population inabsolute poverty decreasedfrom 49 percent in 1988-89 to 37 percent in2001-02 and to 27 percent in 2007 (see Table 1). This is an important achievement, drivenby rapid growth inreal income per capita- for example, duringthe last CAS period (2005-2008) income per person rose at 5 percent per year, faster than in most small island states or the average for Sub-SaharanAfrica. 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 absolutepoverty, compared to 12percent of the urban population. It has also varied across islands and socioeconomic groups: the islands with the largest rural populations (Santo Antgo, Santiago, Silo Nicolau and Fogo) have experienced the highest rates of poverty and food insecurity.6 The major investmentsthat drove the recent economic boom were concentrated on the island of Sal (with its tourism infrastructure), inthe capital city of Praia, and inMindelo on the island of Sgo Vicente, with its deep water port and active businesscommunity. The most recent municipalelections inMay 2008 saw the oppositionMpD (Movement for Democracy) win a narrow majority of mayoralcontests, includingthe key municipalitiesof SantaCatarina, SBo Vicente, Sal andPraia. These comprise the 1988-89 and 2001-02 IDRF householdsurveys (Znqukrito ds Despensas e Receitas Familiares) and the 2007 QUIBB (Unified Survey of Core WelfareIndicators). FoodVulnerability Study ofFamiliesinRuralAreas, FoodSecurity ServicesDepartment,2005. 2 Table 1.Trends inPovertyin Cape Verde between2001and 2007 2001 2007 Headcount Poverty YO Yo of Headcount Poverty YO Yo of Gap of the the gap of the the population poor population poor Urban and rural areas Urban 25.0 7.9 55.1 37.5 13.2 3.3 56.8 28.2 Rural 51.1 20.0 44.9 62.5 44.3 14.3 43.2 71.8 StratalIslands Praia 19.1 5.0 22.0 11.4 11.6 2.7 25.0 10.9 Rest of Santiago 49.3 19.2 32.4 43.6 41.5 13.3 29.9 46.6 Santo. Anta0 54.2 22.1 10.8 15.9 45.6 14.4 9.5 16.3 SBo Vicente 25.5 7.9 15.2 10.6 13.6 3.2 15.6 8.0 Fog0 42.1 15.8 8.8 10.1 39.0 13.2 8.1 11.9 Other islands 28.6 9.6 10.9 8.5 14.3 3.9 11.8 6.3 Socio-economic group Wage workers 31.9 12.1 36.8 31.9 18.7 5.6 35.9 25.2 Self-employed agriculture 45.3 16.5 9.9 12.3 42.9 14.5 8.5 13.6 Other self-employed 28.9 10.0 16.6 13.1 20.8 6.1 17.1 13.3 Other dependants 57.1 21.6 3.6 5.7 35.9 12.5 4.6 6.2 No employment 41.2 14.5 33.0 37.1 32.7 9.5 34.0 41.7 National 36.7 13.3 100.0 100.0 26.6 8.1 100.0 100.0 Source: Instituto Nation de EstatisticaandBank staff. 6. Cape Verde is on track to meet the Millennium Development Goals (MDG). With sustained economic growth and significant investments in human capital, there has been solid progress on social indicators and on the,Millennium Development Goals (see Annex B5 and Appendix 8). The country ranks 102 out of 177 countries in the UNDP's 2007/2008 Human Development Index, which is the third- highest ranking in Africa. Cape Verde is on track to reach most of the MDGs by 2015. The sharp reduction in poverty since 1990 has been complemented by significantly increased access to education and health care. The net primary enrollment rate inelementary education rose from 72 percent in 1990/91 to 95 percent in 2005/06, while net secondary enrollment reached nearly 60 percent in 2005/06. The literacy rate in Cape Verde is 79 percent (84 percent in urban areas and 74 percent in rural areas), and while it still varies by gender (72 percent for women and 87 percent for men), Cape Verde has now achieved parity for girls and boys in school enr~llment.~Infant mortality has beenreduced from 45 to 25 per 1,000 live births since 1990, maternal mortality has also declined as births attendedby skilled health personnel have risen sharply from 54 percent in 1995 to around 90 percent, and life expectancy at birth (71 years) is the third highest in Africa. Cape Verde has made important efforts to contain the spread of infectious diseases. The most recent survey points to an HIV/AIDSprevalence rate of 0.8 percent, versus 0.5 percent in the mid-l990s, while the incidence of tuberculosis has been around 165 per 100,000 since the early 1990s. Cape Verde has also made progress on reforestation, with the forest area risingfrom 14 percent to slightly over 20 percent of land area since 1990. In addition, it has become an increasingly open economy, with trade rising from 56 to 75 percent of GDP since 1990, internet access rising from zero to 7 percent over the past decade and telephony (mobile and fixed line) experiencing an eight-fold increaseto 40 percent since 2000. 7. At the same time, Cape Verde faces important social challenges with high unemployment among vulnerable groups. Though the proportion of the labor force unable to find formal work fell 'Unified Surveyof Basic Welfare Indicators(QUIBB) 2006. 3 from 26 to 18 percent between 1998 and 2008, unemployment remains high, particularly among youth, women and rural populations, and there are sharp differences across islands, reflecting a misalignment between skills and job opportunities and constraints in domestic migration. At the same time, unemployment has risen sharply among migrantworkers from the African continent as constructionfor the tourism industryon the islandof Sal has stalled with the globalcrisis, leadingto economic hardships and increased petty crime.8 Moreover, among the employed population, almost one-quarter work less than 35 hoursper week, anda significantshare ofthe economically activepopulation, especiallythe poor, gaintheir livelihoodsin the informalsector, where they work temporaryjobs primarily in constructionor working as street vendors. Inrural communities, especially during bad agriculturalyears, families have dependedontemporaryjobs createdby the Government's works program(knownas FAIMO), whichhad now been replaced by a community-driven small works program known as Micro-realizaq6es. Unemployment among young people is seen as a key contributor to social problems (e.g. increasing delinquency, early pregnancy, prostitution,drugs andalcohol abuse). 8. Gender inequality is less pronounced than elsewhere in Africa, but still needs to be addressed. Women in Cape Verde are likely to be poorer than men. In urban areas they account for close to 40 percent of non-agriculturaljobs, and when employed tend to earn less than men at similar levels of education and experiences. In rural areas, they account for close to 50 percent of farmers, but tend to farm smaller plotsof land. Inthe public sphere, women account for 15 percentofthe membersof the Legislature, while 50 percent of the current Administration's Cabinet Ministersare women. Women have experienced impressive gains in education and health, including parity in enrollments, declines in maternalmortality,and a decline intotal fertility from 5.4 to 3.4 since 1990. In2005 CapeVerde ratified the women's rights protocol of the African Charter and its legal framework promotes equal rights. Continuedchallenges include reducing the incidence of domestic violence, strengthening access to basic social services for female-headedhouseholdsand furtheringequalityof opportunity in access tojobs and tojustice. 2.3 RECENT ECONOMICDEVELOPMENTS 9. Cape Verde has experienced robust economic growth in recent years. Real GDP averaged 7 percent during 2004-07, peaking at 10.8 percent in 2006. The strong economic performance reflects a major economic transformation in the economy towards a service-based economy led by the tourism s e ~ t o r . ~Growth has been driven by strong public and private investment (through significant FDI) directed largely towards infrastructure development, tourism, and the telecommunications industry. Soundmonetary policy, targeted at strengthening the pegofthe CapeVerde escudo to the euro, has been an importantfactor in maintainingprice stability. Official foreign reserves grew from 2.8 to 3.9 months of importsduring2005-07, and when an interestrate misalignment with the Euribor rate contributedto a temporary decline in reserves, the Central Bank raised its interest rates by 100 basis points in October 2008, reversingthe trend innet outflows. As a result, it is estimatedthat in 2008 reservesremainedat 3.9 months of prospective imports. Fiscal policy has also been characterized by prudence. Higher than expected tax collection and continued expenditure control brought the 2008 fiscal deficit (including grants) down to 1.2percentof GDP from a highof 6.3 percentof GDP in 2005. This fiscal performance has helped contain external and domestic debt (see Table 2 in Section 2.4), although fiscal risks persist, notablydueto the weak performanceofthe electricityutility, Electra(see Box 1inSection3.4). 10. The fifth Policy Support Instrument (PSI) review was successfully completed in December 2008.'0All quantitativeassessment criteria were met, some by wide margins, and steady progress was * Atthe same time, difficulties on the continent, e.g. inGuinea-Bissau, could leadto increasedmigrationto CapeVerde. Servicesaccountfor 76 percentof GDP, comparedto 17 percentfor industryand 8 percent for agriculture. loInJuly 2006, the IMF approvedthe three-year PSIfor 2006-2009. 4 made in implementingthe structuralassessment criteria. The authorities have indicatedin the Letter of Intent for the 5th PSI review that they intendto request an extension of the PSI for at least four more years until 2013 (Le. a one-yearextension ofthe current PSIfollowedby anew 3-yearPSI). 11. The Cape Verdean economy withstood the 2008 food and fuel shocks and the initial months of the global crisis relativelywell, but slowed inthe latter part of the year and 2009 is expectedto be more difficult. Inflationrose to an estimated 6.8 percent in2008 from 4.4 percentthe previousyear as a resultof increases in food and fuel pricesthat were largelypassedthroughto consumers." The country's large stocks of cereal reserves and the appreciation of the Cape Verde escudo against the United States dollar in the first eight months of 2008 somewhat mitigated inflationarypressures from rising food and fuel prices, so that Bank simulations of the net impact on poverty from the shocks suggest around a one percent increase. Cape Verde's economy also held up relatively well in the first months of the global financial crisis, with net tourismreceipts decliningby less than two percent in2008 comparedto 2007.'* Foreigndirect investment rose by 9 percent in 2008, due to the strong performance in the first semester, but during the second half of 2008, real estate investments decelerated because developers, mainly Europeans,faced difficulties securing long-termfinancing. Remittancesdeclined by 17 percent in 2008, following on an earlier decline in 2007. These trends are expected to continue into 2009 (see next Section). 2.4 MEDIUM TERMOUTLOOKAND SUSTAINABILITY'3 12. The global financial crisis means that growth projectionsin the GPRSP-I1will need to be revised downwards. Beforethe global financialcrisis arose in late 2008, the GPRSP-I1was issuedwith projected growthrates of around 8 percentfor 2008-09and double-digitgrowth for 2010-11. These rates were basedon projections of continued strong growth in tourismand infrastructure,but will clearly need to be revised downwards-ven before the crisis, a double-digit growth rate had occurred only in 2006, largelydue to one-offevents. The mediumterm outlook, revisedin March2009, pointsto a GDP growth rate of 3-4 percent in 2009, revised downwards from a January 2009 projectionof 5 percent growth for the year. Revisions reflect principally the impact of the global slowdown on tourism and foreign direct investment (FDI) flows-FDI is expected to decline by 14 percent in 2009 and single digit declines are also expectedintourismandremittances inlightofthe recessioninthe Euro zone. Growthis projectedto recover slightly to 4-5 percent in 2010, and then to increase to 6-6.5 percent in 2011 and 2012, considerably below the mediumterm trend observed in recent years. The eventual recovery is expected to be ledby privateinvestment intourism, public investment in infrastructure,and privatecon~umption.'~ Inflationis projectedto declineto an averageof 3.3 percent in2009 and2.7 percent in 2010 (see Table 2). The projectedtrend in inflationreflectsan anticipateddecline in commodityprices andthe relatedeasing The authorities introduced some measuresto curtail the impact of food andoil price, includingthe eliminationof international trade taxes and VAT on cereals; improvements in importationand distribution efficiency; increased amounts and coverage of non-contributorypensions; investment in new equipment to increase fuel efficiency; creationofa sole logistic companyto handle imports; strengtheningof regulatorycapacity, and a revisedpetroleum products adjustment mechanismto increase transparency. Utility tariffs were also raised by 5 percent in June 2008 in response to higher petroleum prices. In the mediumto long term, Cape Verde will invest in renewable energies to reduce its dependence on oil imports. Bank and IMF staff have moreover recommended building up buffers of foreign reserves and fiscal space, and Cape Verde is receiving TA from IMF staff to enhance its capacity to assess macroeconomicrisks. The true shortfall as aresult of the crisis is not merely relativeto actual values for 2007 but relativeto projectionsfor 2008, as tourismreceiptswere expectedto grow by 32 percent in 2008 and24 percentin2009. '' l3 Revised projectionsare preliminary and will continue to be revised in consultationwith the Government on a regular basis, iventhe rapidly changinginternationalenvironment. The tourism sector is also driving growth in other sectors, such as construction, retail, transportation, agribusinesslfishing, telecommunications, energy, water, financial services and personal services. It could also drive growth in other sectors that supply inputs, includingfood, handicraftsand light manufacturing. 5 of inflationarypressures. Continuedfiscal discipline and the fixed exchange ratewith respect to the euro providea solidanchor for low inflationaryexpectations. 13. While the medium-term impactof the globaleconomic slowdown on Cape Verde is hard to estimate, Cape Verde has built up some buffers against external shocks as a result of strong economic performance in recent years. The Authorities have some scope to manage the external shocks since the country has built up fiscal space and internationalreserves that enable Cape Verde to mitigate their impact. Progress in the implementation of structural measures has also been steady, reinforcingthe positiveeffects of prudent macroeconomic management. Inflationis expectedto stabilize at around 2 percent by 2010-11, in line with euro zone rates, as a result of the currency peg. Despite continued fiscal prudence, the overall budget deficit (including grants) is projectedto increase steeply to 5.7 percent of GDP in 2009 to provide some fiscal stimulus and average about 5 percent of GDP during 2010-12. Tax revenues as a percentage of GDP are expectedto decline as the economy slows down but average 22 percent for 2010-12. Overallexpenditure is projected at 37 percent of GDP in 2009, notably due to an expansion in public investment designed to ease infrastructure bottlenecks. Spending will gradually decline to 34 percent in 2012. Improvementsin tax administrationand in public expenditure management will help to contain the fiscal deficit. The overall budget and the Government's medium term fiscal program are appropriate as the spending expansion is directed to infrastructure spending, the deficit is mostlyfinancedby concessional loans, and debt sustainabilityis preserved. The current account deficit (includingofficial transfers), which deteriorated from 5 percent of GDP in 2006 to 9.1 percent in 2007 and 13 percent of GDP in 2008 is projectedto deteriorate furtherto 14.7 percent of GDP in2009 as a resultof the slowdown intourism receipts andremittances. Projections indicate that the current account deficit (includingofficial transfers) will improve slightly to 13.9percentin 2010 and average 12percenta year during2011-2012. As the CapeVerdean economy recovers and the economic conditions inEurope improve, imports of investment goods are expected to increase-largely driven by FDI inflows-and tourism receipts will grow, although remittances are expected to remain subdued. Notwithstandingthe large current account deficit, internationalreservesare projectedto remainabove 3 months of imports. Table 2. BasicMacroeconomicIndicators,2004-12 Indicator 2004 2005 2006l 2007' 2008' 2009' 2010' 2011' 2012' RealGDP growth(%annualchange) 4.4 6.5 10.8 6.9 6.0 3.5 5.0 6.6 6.3 RealGDP per capitagrowth(% annual change) 2.5 4.6 8.8 5.0 4.0 1.6 3.0 4.5 4.3 Overallfiscal balance, including grants(%of GDP) -3.8 -6.3 -4.9 -0.7 -1.2 -5.7 -5.1 -4.6 -5.5 Budget Financing 3.8 6.3 4.9 0.7 1.2 5.7 5.1 4.6 5.5 Foreign(net) 0.9 3.2 3.0 2.0 2.7 5.0 3.6 4.0 3.9 Domestic(net) 3.8 2.9 2.9 -0.8 -0.8 0.7 1.4 0.6 1.6 Net errors and omissions -0.9 0.2 -1.0 -0.5 -0.7 0.0 0.1 0.0 0.0 Current account balance, including officialtransfers (% of GDP) -14.4 -3.4 -5.0 -9.1 -13.0 -14.7 -13.9 -12.5 -11.9 Reservecoverage(months of prospectiveimportsofgoods and 2.4 2.8 3.1 3.9 3.9 3.7 3.6 3.7 3.8 services) CPIannual average('YOannual -1.9 0.4 4.8 4.4 6.8 3.3 2.7 2.0 2.0 change) Total Central'Governmentdebt 88.9 87.1 72.6 62.3 60.2 58.8 59.7 60.6 59.4 'Preliminary; 2Projections Source: IMF,MinistryofFinance andPublicAdministration, and Staff estimates. 6 14. Significant progress with debt sustainability management sets a good basis for maintaining sustainable debt levels over the medium term. The share of total central Government net debt and guarantees to GDP started to decline in 2005, and has been declining sharply since then. It fell to 57 percent of GDP in 2008, down from 87 in 2005, owing to the rapid GDP growth and prudent fiscal stance. The domestic debt-to-GDP ratio was reduced from 33 in 2005 to 13.8 percent in 2008. An analysis of the sustainabilityof Cape Verde's public debt carried out in December 2008 concluded that, despitethe likely gradualreduction in access to concessionalloans, the risk of debt distress is low and all external debt indicators would remain below the relevant thresholds under the baseline and alternative scenarios (see Appendix 3). The main risks to the debt outlook are currency exposure and contingent liabilities. Notwithstanding the fact that the debt trajectory has shifted upwards since the 2008 Debt SustainabilityAnalysis (DSA), CapeVerde's risk ofdebt distress remainslow. 15. The medium term effects of the rapidly changing external environment on Cape Verde's economy are difficult to gauge and overall risks remain tilted towards the down-side. A preliminary sensitivity analysis undertaken in March 2009 shows that a decline in tourism inflows equivalent to 1 percentof GDPwouldreduce current growthprojectionsby around0.75-1 percentagepoints, with a more modest impact onthe fiscal balance, of 0.1percentofGDP.l5Dueto partialself-stabilization-xplained by the fact that less tourism implies the need for less imports for tourism-the impact on the balance of payments would be small, between 0-0.1 months of prospective imports. An increase in oil prices of US$10per barrel(fromUS$44 per barrel) would reducethe growthrate by 0.1-0.3 percentagepointsand would have an effect onthe balance of paymentsequivalentto around 0.1months of prospectiveimports, however the fiscal impact would be negligible. There are also downward risks to the economic outlook associatedwith steeper decreases in FDIand other capital flows, includingdonor assistance. Indeedthe tighteningof liquidity conditions in Europe has already led to a deceleration in new real estate projects becausedevelopers, mainlyEuropeans, have faced difficulties securing long-termfinancing.I6Moreover, remittances could decline further as a result of weakening labor markets in the European Union, with potentially negative effects on household welfare and on external balances. Additional risks include volatility in commodity pricesand a potentialindirectimpact of the financialcrisis on CapeVerde banks. While domestic banks havevirtually no exposure to sub-prime assets, ownership of banks in Cape Verde i s highly concentratedunder Portuguese ownership. A further fiscal risk derives from Electra, the public electricityand water utility, which is in a critical financial situation. Losses equivalent to 1.3 percent of GDP erased half of Electra's net worth in 2007, and credit has been curtailedby the oil companies that constitute its mainsuppliers. The resultingpower supply disruptions have an immediatenegative impact on economic growth. The explicit risks to the budget are known, as domestic debt equal to around 4.5 percentof GDP at the endof2008 hadto be issuedinfavor ofElectra." 16. A number of,factors help to mitigate these down-side risks. The mitigatingfactors include: the recent build-up of foreign exchange reserves and fiscal space; the accumulation of grain stocks to buffer against droughts and other food shocks;" the standing line of credit extendedby the CentralBank of Portugalto support the peg of the escudo to the euro; effective public expenditure management(with expanded public investment foreseen in 2009 together with restraint on current expenditures); and continued adherence to the IMF PSI. In addition, the Government has a strong track record of fiscal discipline and of rapid and prudent adjustments to changing economic condition^.'^ This will place the l5 The potential impacts identified in the (partial) sensitivity analysis do not take into account shifts in structure or off-setting policy measuresby the Governmentthat couldpotentiallymitigate effects such as weaker tourismdemandor FDI. l6 Sensitivity analysis indicates that an adverse shock to FDI, grants or remittancesequivalent to 1 percent of GDP would yield impactson GDP, the balanceof payments and fiscal accountsthat are similar to those for tourisminflows. "The implicit fiscalrisksare currentlybeingassessedbythe government,especiallythe amountsneededto recapitalizethe company. ''GPRSP-I1also refersto Government's intentionto preparea Strategic Action Plan for aNationalDisasterReductionPlatform. This came out clearlyduring last year's food andfuel crisis. 7 Governmentin goodsteadas it faces the volatileglobaleconomic conditions. Underthese conditions, the Bank and IMF staffs will be supporting the Government by engaging in enhanced surveillance of key economicvariables andwill standready to adjust projections andpolicyadvice as needed. 111. KEYDEVELOPMENTCHALLENGES AND OPPORTUNITIES 3.1 PROMOTING EFFECTIVEGOVERNANCE 17. Cape Verde could usefully consolidate and extend significant recent advances in governance. It receives fairly high ratings for rule of law and accountability.20It has conducted a series of reforms since 2005 that are describedin more detail in the CAS CompletionReport (see Appendix 2). However, importantreforms remain to be completed in such areas as state reform and decentralization, procurement and financialmanagement, and security andthe rule of law. The Government is committed to advancingon these reformsunderthe first pillar ofthe GPRSP-11. 18. A broadand participatoryState restructuringeffort has beenwell designed but civilservice reform (CSR) has been slow and some follow-up actions may be politically difficult. The Government has launched a comprehensive review of its CSR legal and regulatoryframework, with the goal of providing the State with a better trained and motivated workforce. Several crucial pieces of legislationshave been drafted or adopted already,21and a human resource database has been developed and integratedwith payroll, which is a key step towards CSR. However, progress has been delayed by vested interests and by the needto identifythe requisite technical skillsto design key parts of the reform package, e.g. in relation to remuneration. Further work is required on streamlining, organizing and enhancing the capacity and efficiency of the civil service to meet the GPRSP-I1objective of efficient attentionto citizens' needs. As an example, a fairly straightfonvardmerging of functions has proven difficult to implement in the case of the Road Institute and a unit with overlapping functions in the Ministry. 19. Decentralizationis taking root but further reform is needed to reap the full benefits. Since municipalitiesin Cape Verde are and have limitedresource bases, central Government transfers constitute their most important source o f funds. Municipalities have become active in their areas of responsibilities,andtransfers to them haverisensince the 2005 localfinances law, butthe framework law on decentralization, adopted by the Council of Ministers in March 2008, still needs to be ratified by Parliament and implementation in order to rationalizeexistingstate structures, and it has beendifficult to achieve a consensus. The Governmentrecognizes that key challenges include:(a) enhancingthe regional coordinationmodel without creating more structures; (b) clarifying roles and responsibilitiesnot only through the law but via concrete transfers agreements/decisions; and (c) addressing such issues as land sales regulation, municipalities' arrears and accountability. 20. The Government intends to consolidate important achievements in the area of financial management and e-government. Achievements during the past few years under the e-government initiative, under the auspices of the NOS1(the OperationalNucleus for the InformationSociety, or Cubo Verde Digital), include: (a) rollout of a functioning Integrated FinancialManagement and Information System (known as SIGOF) in the national Government and the largest municipalities; (b) timely 2oThe overall 2008 CPIA rating is 4.2 with the transparency, accountability and corruption inpublic sector rating at 4.5 and the property rights and rule-basedgovernance rating at 4. ''They include the Organic Law on civil service, endorsed in 2008 by the Council of Ministers, and draft laws on mobility and salary reform. 22Only two have more than 50,000 people. 8 transmission of state accounts to Parliament on a quarterly basis and publicationof the 2009 budget on the web; (c) revampingofthe tax registryandthe introductionofthe VAT; (d) approvalof Organic Laws for control functions and strengthening of the Court of Auditors, and (e) reengineering of various administrative processes to create an electronic single-window for the most used services. Further extension and capacity buildingaround systems, as well as ensuring appropriate treatment of contingent liabilities and introducing program-budgeting to align annual budgets with the GPRSP-I1 and both sectoral and overallMediumTerm ExpenditureFrameworks(MTEFs) are key priorities. Inaddition, the Government intends to further the financial management reforms in the areas of (a) oversight of fiscal risks at the sub-national level; (b) oversight of contingent liabilities related to public sector entities; (c) increasingthe effectiveness and coverage of internalcontrols, which will require further recruitment and capacity building, and (d) enhancing the scope, content and follow-up of external audits conducted through the Tribunal das Contas, which will also require further recruitment and capacity building. Moreover, the Authorities consider that the timeliness and comprehensivenessof donor informationon projectscouldalso beenhanced. 21. A new procurement law in linewith internationalgood practices sets a good foundation for further progress on procurement reform. The new law was approved by the Legislaturein 2007 and implementingrules andregulationswere issuedinDecember2008. A new procurementmanagementand informationsystem is being set up that will be linked with the SIGOF. The critical next steps include establishing the new public procurement institutional framework, which includes a new regulatory authority (known as ARAP) to deal with policy, complaints and audits, as well as procurement management units inthe contractingauthorities to conduct procurement transactions at the level of these authorities. The Governmentis now workingtowards accompanyingthe above steps with comprehensive nationalprocurement capacity development, a strengthenedprocurement controlframework and effective independentaudits by ARAP to ensure compliancewith the new rules. 22. Cape Verde has taken steps to address challenges from the global drugs trade and from money-launderingthat could underminesecurity and good governance. CapeVerde has beencaught up in a rerouting of drugs from Colombia and Venezuela through various West African States for consumption in Europe, and the fragile conditions of some States on the African continent has servedto enhancethe riskfor CapeVerde as well. Moreover, its large off-shorebankingsector makes it vulnerable to money laundering(see Section 3.3). At the same time, street crime had begun to rise in Praia and on Sal. The Authorities have taken prompt enforcement measures to address these challenges before they take root and have implemented measures in the area of national defense and security and the rule of l a d 3that are crucial for safeguardingthe quality of life of Cape Verdeans and attractingand protecting foreign investments. Indeed, Praia is seen by internationalinvestorsas one of the most secure capitalson the continent. At a sub-regional level, Cape Verde has beencoordinatingwith other ECOWAScountries on security issues. Cape Verde has hosted two internationalconferences on drugs enforcement and on anti-money laundering(AML) since October 2008 to brainstorm on effective approaches, has adopted legislation on AML to strengthen controls, and is developing legislation to counter the financing of terrorism(CFT), although more will needto be done in the context of strengthenedbankingsupervision, notably of the off-shorebankingsector. These are more crime-focused aspects of a broader program to strengthen the rule of law that has been under way to promote greater access to justice through, e.g., digitization of the laws and the Official Gazette, establishment of Casas de Direito (legal centers) to provide legal services to the poor (with a particular focus on women), and strengthening of alternative disputeresolutionmechanisms. 23These include the creation o f the National Police, the reform o f the Armed Forces, the training o f the judicial police and the enhancement o f maritime surveillance. 9 3.2 STRENGTHENING HUMAN DEVELOPMENT 23. Cape Verde's key challenge in the area of human development is a misalignment between the skills requiredin the jobs market and the education and training provided to its youth. While Cape Verde has made significant progress in primary and secondary education, the country faces a significantchallenge in ensuringemploymentopportunities for its relativelyyoung population. The main reason is that insufficient youth emerge from secondary schools or from the Technical and Vocational Education and Training (TVET) system with the requisite skills sets for the services and technology industry.24 Higher education in Cape Verde is still nascent, with the country's two universities (one private, one public) established only in 2001 and 2005 and as yet characterized by fairly limited and inequitableaccess. The challenge is: (a) to better identify market demand for skilled labor in specific growth sectors such as construction, tourism and commerce; (b) to improve the existing planning, financing and coordinationmechanisms in order to promote more, and more effective, demand-driven training delivery using existing, under-utilized training centers in more cost-effective ways and with greater engagement by the private sector. The required technical and managerial skills for key sectors such as tourism, construction and finance are still rare, and those who possessthem often have higher ambitions. Thus upgrading TVET is imperative to ensure Cape Verde's competitiveness in growth sectors, and to this end, the Government recently created an Institute for Employment and Professional Trainingto addressthese issues. 24. Cape Verde has satisfactory healthindicators for its level of income, but faces challenges in terms of adequate resources to address both infectious diseases and the rising non-communicable diseases that characterize a middle income country. As noted above (Section 2.2), Cape Verde has made significantprogressin reducingbothinfantandmaternalmortalityrates, increasinglife expectancy, and containingthe spread of infectiousdiseases such as HIV/AIDS and tuberculosis. However, its open economy, large inflows of tourism and proximityto the continent place Cape Verde at continued risk of communicable diseases, while the cost of outreach to more remote underservedpopulations is high. At the same time, as life expectancy has increased, so has the prevalence of non-communicable diseases (NCDs), such as hypertensionand diabetes, which generally imply much higher unit costs to treat. The National Health Policy for 2007-10 identifiesaddressingNCDs and promotingpreventivehealth as key priorities; proposes possible scenarios which would sustain the development of the health system, and develops strategic orientations for health sector reforms. A subsequent public expenditure tracking survey for the health sector detected several problems to be addressed, such as weak budgeting and expenditures processesat the decentralized level(delegaciasde satide). Thus an appropriately resourced programis neededto increasecoverageand efficiencyin healthservices. 3.3 ADDRESSINGSTRUCTURAL ANDSECTORAL CHALLENGESFORCOMPETITIVENESS 25. Cape Verde has taken numerous measuresto promote competitiveness, even though it still faces a rangeof challenges. The key areas inwhich further advances are required are relatedto the ease of doingbusiness, support for smaller businesses, access to land and finance, the cost of labor, and trade facilitation. Substantial progresshas beenmade in each ofthese areas in recentyears, butthere is further scopeto promotearobust reformagenda ineachcase. 26. Cape Verde has been advancing solidly on the ease of doing business and is turning to increase support to microand small-scale enterprises. AlthoughCape Verde experienceda decline in its Doing Business ranking in 2009, the ranking has not captured the remarkable improvements in the 24To reduceunemploymentto 10percentby 2012, 6,000 people needto betrainedannually. In2008, only 1,853 were trained. 10 ease of startingof a business in CapeVerde.25The one-stop shops-known as Casu do Cidadzo-on Sal and in.Praiaenable entrepreneursto register a business in one day and citizens to obtainbasic registration documents within minutes. Since July 2008, more than 300 businesses have been registeredwithin 24 hours, and since December 2007 over 3,000 certificates have been issued through the on-line facility, including many to emigrants abroad.The 2009 Doing Business survey ranks Cape Verde at 79 (out of 178 countries) for ease of dealing with licenses and permits and 40 for enforcing contracts-its cost of enforcing contracts in terms of both duration and expense are significantly ahead of regional averages (see Appendix 4). Laws and regulations are publicly available (on the internet) and are not changed arbitrarily. Mechanisms exist to resolve conflict of rules and these are regarded as highly transparent, ensuring a high level of protection of property rights. A greater challenge and a key priority for Government is to enhance support to micro and small scale enterprises (MSMEs) to operate on a more equal footing. To this end, the Government launched the Agincia de Desenvolvimento EconGmico e ZnnovaqCo (ADEI) with a mandate to provide incubator services, coaching and consulting services, business development services including access to finance, market linkages, and promotion of informationand communicationtechnology. Plans are under way to open the ADEI office by July 2009. The agency will face challenges in ensuring it has (a) highly qualified staff to provide high-value technical assistance; (b) technology infrastructure for the incubator and other information and , communications technology requirements; (c) a management information system that is up to the task, and(d) a clear demarcationof responsibilitieswithNOSI. 27. Effectiveland management is an essential element of a policy to promote competitiveness. A new land use law has been approved and a law on land registration is well advanced. The legal framework for titling and applyingliens for most lands is clear and land is frequentlyusedto collateralize loans. Moreover, the implementation of the cadastre system is progressing well with UNDP support. At the same time, local governments are not yet well equipped to deal adequately with land management issues, and rural-urban migration has led to squatting on public lands in rural areas or at the urban periphery, with unclear control rights for the de facto tenants. In addition, land registration remains expensive andtime consuming, leadingto problems with unregisteredtransactions and subsequent delays in regularizationor in compensatingtrue owners ifthe land is to be reallocated for public use. Landuse planningthus, features as an integral element ofthe GPRSP pillar on infrastructuredevelopment. 28. While the new labor law contains some positive reforms, various elements of the reform have increased rigidities in the labor market that need to be addressed. A new labor law was approvedin2007, following many years of negotiations amongthe Government, unions andthe business sector, and reflects a delicate balance of different interests. The law introduces some favorable labor market measures,notablythe eliminationof wage indexationto inflation-which is importantin light of Cape Verde's currency peg and consequent limitations on devaluation as a means of enhancing competitiveness-and greater flexibility for employers to change selected aspects of the labor contract. At the same time, the law introduced importantprotections for workers, includinglimits to the number of years workers can be offered temporary contracts, the obligationto pay vacation days not taken, more days of maternityleave, and extendedworker protections. The key challenge is that it remainsdifficult to release a redundant or non-performingworker, requiring a sequence of notices and compensationthat is regarded as costly. This in turn means that only a relatively privilegedfew enjoy the benefits of these protections sincethe cost of firing workers is an importantfactor behindthe creation of less formal sector jobs-the informal sector is estimated to account for 40 percent of the economy. While labor productivity is high in Cape Verde, the high costs of labor relativeto the value of their output make it hard for the country to compete (see Figure 1). Therefore successful pursuit of Cape Verde's economic transformationagenda will require additional labor reforms, especially in relation to the cost of firing *'Aone-stop shop for business registration had been open on Sal since March 2007 and a second one-stop shop was opened in the capital city in July 2008, however the DoingBusinesssurvey was limitedto the capital city and hada cut-off of June 2008. 11 workers, so as not to undermine the advantagesofferedby its geo-strategic location-even as it seeks to maintainsocial cohesionwith its labor policy. In light of the delicacy of these reforms, the Government is evaluatingthe appropriate timingfor next steps inthis area. Figure 1.Productivityper Worker and Ratio of Cost to Output per Worker Vaiue-Added perWorker Dommmn Republic - - HValua-Addedper Gwans wrkar in Garments Philippmus Indonesia South Wncs - Maunttus Senegal --I C w Veda _,__ ~ _ _ I - - - _ - , I , I 0% 20% 40% 60% laborcost perworker (%of value added1 ISource: Summary of Cape Verde Investment Climate Assessment, AFTFP Note 27, August 2008. 29. Cape Verde has a large financial sector relative to its GDP that has in general been able to support the goals of growth and economic development. The market for financial services appears competitive and credit has supported (and outpaced) the recent high growth rates in the economy. The country hasfive on-shore commercial bankswith assetsamountingto about 90 percentof GDP. They are funded in large measure by emigrants, who providehalfof all time deposits. Cape Verde also has seven functioningoff-shorebanks and several others that have recentlybeen licensedbut are not yet operating, with total assets amountingto an additional 150percent of GDP.26All banks are private.The two largest on-shore banks (both foreign-owned) account for 90 percent of the on-shore market by assets. The banking sector is amply profitable and-being relatively well-insulated from developments in international financial markets-has so far been little affected by the financial turmoil. Second-round effects from the global slowdown may prove more important, as large tourism-related construction projects slow and remittances decline, although this must be weighed against continuedoverall growth in the economy. Domestic banks have experienced no apparent pressure on deposits or on wholesale funding from parent banks. Still, strong domestic credit growth and strengthened prudentialregulations drove the aggregate capital asset ratio of the bankingsector down to the prudentiallyrequired minimum of 10 percent, implying inadequate capital to support further rapid growth or a severe downturn. Moreover, the strong reliance on emigrant deposits presents a risk in a system without deposit insurance that competesfor fundingwith insuredU.S.andEuro area banks.27 30. Even with Cape Verde's large financial sector, access to finance remains challenging for smaller enterprises and there are certain risks that warrant close supervision. Interms of access to finance, credit to the private sector is well above the regional average-at 45 percent of GDP-and bankingtransactions have been facilitated by the rapid spread of ATMs, point-of-saletransactions and electronic banking since 2000, however the Government remains concerned about adequate access to finance for SMEs. While around 45 percent of firms have loans, small, domestically-owned microenterprises, notably those whose managers have less education, face difficulties in obtaining 26 The banking sector dwarfs the nascent stock market, which had a capitalizationof 16 percent of GDP at end-2007and limited ''turnover,see especially of shares. Banks the 14 percentreserverequirementand 50 percentloan-to-depositratio as reassuringto depositors. 12 overdrafts or loans.28However, an arguably morepressingconcern for the financial sector is that the off- shore sector is on the one hand not contributing significantly to the Government's objective of diversifying growth in the economy, and on the other hand, presents important risks, especially reputational risk. This is because: (a) balance sheets have been expanding rapidly as non-resident deposits have been attracted by favorable bank-secrecyand taxationregimes; (b) the regulatoryregime is lighterthan for on-shores; (c) compliance with prudentialrequirements-including capital adequacy-is low, and(d) there hasbeenforbearance in supervisionmostlyas a result of inadequateuseofenforcement tools. The risks of money laundering and vulnerability to contagion from the financial crisis in other countries are therefore also higher. Priority reforms to mitigatereputationaland other risks should focus on harmonizing the regulatory framework with those for the on-shore sector, tightening licensing requirements to allow only banks with clear majority ownership links with well-supervisedfinancial institutions abroad to operate in Cape Verde, implementingthe newly approved anti-money laundering legislationand strengthening supervisorypractices andcapacity. 31. Cape Verde has taken several key steps to reduce trade barriers and facilitate trade, including accession to the World Trade Organization (WTO). In 2004, a streamlined tariff regime was introduced that removeddiscriminatorytaxes on trade, other than bands establishedwith ECOWAS partners, and brought the sin le average most-favored nation tariff down to 10.9 percent. In July 2008, Cape Verde became the 153` member of the WTO, and the country expects to enter into an Economic 9 PartnershipAgreement (EPA) with the EuropeanUnion (EU), which is by far its largest trading partner. Cape Verde also has relativeefficientcustomswhen comparedwith other countries on the continent. Its introduction of ASYCUDA++ systems accelerated processing of cargo, and procedures are relatively streamlined in terms of the number of steps for approvals, although there is still scope to reduce the number of days for exportingand importingproducts-nineteen andfive, respectively. 3.4 INVESTING IN INFRASTRUCTURE 32. Investment in infrastructure is critical for the Government's economic transformation agenda, especially in energy, water, transportation,and infrastructurefor the tourism and fisheries sectors. The Governmenthas a limitedability to tap into long-termfinancing for infrastructureprojects. Despite significant flows of private investmentsto tourism and real estate, the country relies heavily on donors to finance major public investments. Cape Verde invests heavily in infrastructure(US$400 per capita in 2006), however a reviewofthe broaderreformagendasuggeststhat infrastructureis the key area inwhich clear progresson reforms, includingmorepublic-privatepartnerships(PPPs), is mostrequiredto achieve economictransformation. 33. The high cost and inadequate supply of electricity is without doubt one of the most important constraints to the economic development of the country.29While Cape Verde will always face high costs of electrification as an archipelago, the present sector arrangements warrant significant upgradinganda reassessment. Electra,the nationalpower utility, supplieselectricityinthe nine inhabited islandsofthe countryand also operates as a water distributionutility inthe four mainislands.30Electra's financial performance has deterioratedrapidly, mainly due to lack of investments in generation, delayed and partial tariff adjustments, customer arrears, obsolete equipment, and an escalation of non-technical ** Recentstudies by IFC PEP-Africaand the 2006 InvestmentClimateAssessment point to weak capacity for preparingbankable projectsas an impediment to accessingcredit, in additionto the cost ofcredit. 29 The 2008 DTIS and 2006 ICA survey findings indicatethat electricity supply is by far the number one constraint faced by Cape Verdean operators. Sixty percent of enterprisesconsider that power supply is a major obstacleto their operations, and the private sector reports that outages account for losses amounting to up to 11 percent of sales. Enterprisesalso complainof high rates(twicethose ofPortugal)andpoor service. 30 The main islands are Santiago, SsLo Vicente, Boavista and Sal. Water supplies in the smaller islands are managed by the municipalities. 13 losses due to fraud and unauthorized connections to the grid (see Box 1). While Electra increased generation by over 8 percent per year to 250MWh during 2002-06, the current system relies almost entirely on multiple, inefficiently small, expensive and polluting diesel-run generators on each island, connected to clients by an inadequately low voltage transmission system and an ageing distribution network. The resulting power supply disruptions have an immediate negative impact on economic growth, andwhile power outages are infrequent comparedto other countries inthe region, there is not yet a widespread practice of back-up generation so that the outages are more costly and disruptive to business. Eventhough Cape Verde has exceptionalwind energy potential,at 3 percentof generationthis i s as yet largely untapped. Finally, with losses equivalent to 1.3 percent of GDP injust one year (2007) erasing half of Electra's net worth, the company is de-capitalized and without credit from its main suppliers, the oil companies. The explicit fiscal risks to the budget are clear, since domestic debt issued to cover Electra's losses reached approximately 4.5 percent of GDP by the end of 2008.31 Government therefore intendsto investheavilyinmore sustainable, low-costwind generation(includingvia PPPs) and inupgradingthe network while seekinggreater efficiencyinthe managementofElectra. Box 1. Electra's Institutional and Operational Challenges Access to electricity in CapeVerde is relativelyhigh at 70 percent(90 percent inurban areas but less than 50 percent in rural areas). The cost of electricity and water service provision is high due to the small scale of each service center and consequent widespread use of dieselratherthan less expensiveheavy fuel oil for thermal generation, scarcity of fresh water resourcesand the needto desalinizesea water, andhigh logisticalcosts due to the insularityofthe country. Unsatisfactory and deteriorating financial performance. Electrawas privatizedin 1999, when EDP (the main Portuguese integratedpower utility) acquired a majority equity stake, and coverageexpanded rapidly until 2003, when most of the key relevant indicatorsbegan to deteriorate. The company's disappointingoperational performance, combined with delayed and partial tariff adjustments, resulted in a deteriorationof Electra's financial performance, and since EDP and the Authorities were unable to resolve their dispute over tariffs, they agreed in 2006 to an amicable resolution involving a financial restructuring of Electra that reduced its debts substantially(from 76 to 45 million) and raised Government's ownership stake to 85 percent, and EDP departed. A new management team took over, but has not been able to improve Electra's operationalperformance. Onthe contrary, distributionlossesrose to 25 percentin2007, comparedto 18percentin 2003, with lossesexceeding30 percent in Praia, reflectinga significant level of uncontrolledfraud. Key challenges. These include: (a) improving the company's commercial performance; (b) ensuring the approval of more timely and better calibrated tariff adjustments by the Economic Regulation Agency (ARE); (c) significantly increasing generation and reducingits cost by consolidatinggeneration in larger units usingheavy fuel oil, upgradingtransmission lines, and pursuing substantial investment in wind energy through independent power producer arrangements (which would also provide a steady supply of energy during non-peak hours for desalination); (d) upgrading the ageing distribution network; (e) instituting good corporate governance practices in Electra, with more active monitoring, and (9 mobilizing direct financing and guaranteesfor Electra. 34. Water supply is a critical issue owingto low and erratic rainfall. The country has the lowest undergroundwater resources in sub-SaharanAfrica after Djibouti. Water is an expensive commodity.32 Desalination plants require substantial energy supplies and account for about 88 percent of the water supplied by Electra, although users complement this with water from surface run-off or underground sources (using wells and boreholes) that is not supplied by Electra. Electra's production of water averaged slightly over 4 million cubic meters during2003-06, of which around 30 percenttranslated into lossesratherthan sales, which is worrisome inlight ofthe highcost of desalination. 35. Effectiveregulationofservice providersin the various infrastructuresectors is essential. To this end, the Government established the Ag2nciu de RegulumentuCfio EconGmicu (ARE) in 2004 to regulate petroleum products, electricity, water, telecommunications and urban and maritime passenger 3' The implicit fiscal risks are currently being assessed by the government, especially the amounts needed to recapitalizethe company. 32 The costs of runninggenerators and buying desalinated water are two of the cost drivers behind the 11 percent of total hotel operatingcosts which are madeup by utilities. 14 transport. Since then, responsibilityfor telecommunications has beentransferred to the NationalAgency for Communications. ARE is responsible for setting and implementingtariffs for petroleum products, electricity and water but has not always carried out this mandate effectively, and will require further capacity-buildingsupport. 36. Transportation is another key area requiring a strong reform agenda, one that takes an integrated, multi-modal approach to linking the islands of the archipelago. There has been rapid growth in the movement of vessels, merchandiseand passengersbetween 1995 and 2006. For example, tons of merchandiserose by 260 percent to 1.7 million tons and the number of passengers increasedby 250 percent to 673,000 over the period. Nevertheless, shipping costs in Cape Verde are extremely high, with a container costing1,000 to transport from Praia to Sal versus 2,000 from Lisbonto Sal. Inter- island transport costs not only erode the cost advantage of Cape Verdean suppliers over overseas suppliers but also discourage economic activities in the peripheral islands that depend on inputs from outside. While the Government has privatizedinter-islandshipping, the maritime fleet33remains small and obsolete, providinginsufficientandunreliableservices. Moreover, logisticalfacilities for transferring cargo from maritimeto roador air transport are extremely limited, addingto storage costs and delays that undermine competitiveness. Impressive investment has beenundertakento upgradeairports (in Praia and on Sal, Silo Vicente and Boa Vista), and port facilities (notably in Mindelo and Praia, with plans under way to expandthe port of Palmeiraon Sal), as well as to rehabilitatethe core roadnetworkto a levelthat can be maintained on a sustainable basis. Nonetheless, bottlenecks in coordination between air, sea (ferry) and road transport remain to be addressedto support trade, tourism and inter-islandconnectivity more broadly. Addressing these bottlenecks is essential if Cape Verde wishes to make use of its geo- strategic locationto achieve its economic transformation objectives. 37. The transportationsector concentratesmost of the key unfinishedelementsof Cape Verde's privatizationagenda, and reform of the sector is essentialto the country's development. While port infrastructure is undergoing considerable rehabilitationand upgrading to address physical constraints, management of the sector by the State's port authority, ENAPOR, continues to be inadequate, with an unwieldybureaucracy and poor governance that deter investment in inter-islandshipping services. There is strong politicalwill to develop Cape Verde as a hub/gateway for cargo and passengers; however Cape Verde suffers from competition from Dakar, which has a much larger cargo base and equally rapid customs clearance. Privatizationof ENAPOR has long been on the Government's agenda but has been delayed since the 1990s4ue in part to the difficulties it would likely imply in down-sizingthe number of stevedores and administrative port staff. The same holds for Estaleiros Navais de Cabo Verde (CABNAVE), a shipyard, and INTERBASE, a fish freezing and storage facility. In the case of air transport, the national airline (TransportesAe`reos de Cabo Verde or TACV) has long been slated for privatizationbut the process has been postponed repeatedly due to stiff resistance within the firm, the dilemma of how to handle less profitableinter-islandroutes and insufficientpoliticalcommitment. Until recently, TACV hada monopolyon domestic flights and it continues to etljoy public subsidies, although competitive carriers have now been allowed to open scheduled services in the domestic market. Good international access via air and reliable inter-island service will be essential to drive down high transportation costs, which is in turn essential so as not to constrain growth in Cape Verde's tourism industry. Thus to achieve the economic transformation objective of becoming an internationalhub for transshipments and transit, Cape Verde will need to make transformative changes in institutional arrangementsfor its ports and its air transport. 38. Since tourism accounts for 18 percent of GDP and the vast majority of FDI, it is important that a long-term comprehensive strategy be developed for investingin the sector. The Government is preparing a Tourism Master Plan that should clarify how the country's development strategy will 33The 13 membersof the associationof ship-ownershave a fleet of about20 vessels in operating condition. 15 pursue tourism development; what kind of tourism should be pursued; how benefits can be extendedto more islands andto small enterprises through the value chain; what kind of infrastructureinvestments (in water, electricity and waste management) are neededto sustain the industry; what kind of structuringof investment incentives is required to ensure sustained rather than speculative investment, and how to ensure that tourism is not developedat the expense of the environment. Movingforward, it is clear that more careful zoning and developmentmaster plans are neededto promote desirable spatial development within municipalitiesor for each island, and further engagement of the municipalitiesand UNOTUR,the new Chamber of Tourism, is warranted with regardto the development of tourism on public lands under the Integrated Tourism Development Zones. Finally, it will be importantto systematically brand Cape Verde in a way that looks beyond its white sand beachesto highlightthe country's more unique cultural andnaturalfeatures, includingitsmusic. 39. The fisheries sector needs investment in infrastructureand strengtheningof its institutional and regulatoryframework. The sector's contributionto GDP has fallen from 2 percentof GDP in 2000 to 1 percent in 2007, however with 60 of this generated by small-scale fishermen (who generally earn incomes well below average GDPhapita), the sector may represent as much as 5 percent of the economically active population-creatingjobs for small-scale fishermen, fishmongers (most of whom are women) and seasonal workers employed in industrial fishing and canning. There is limited industrial fishingby publicly ownedfleets and productivityhasbeenlow. Fishresourcesare not exploited, handled or gradedeffectively; current subsidies for ice, fuel andvessel credits are notwell targeted, andthe sector is facing overfishing as productionhas not risen beyond 10,000 tons per year. The 2007 World Bank Fisheries Assessment concluded that CapeVerde simply has less exploitablefish than has been assumed inthe pastandhas beenunableto recently assess the status ofmajor fish stocks; the most likely scenario suggests that most fish resources are fully or over-exploited. Furthermore, most of the country's fish resources are high value fish in deep waters and illegal fishing by foreign ships is a problem as Cape Verde only has a very limited surveillance capacity. It also has a relatively weak capacity to negotiate with the large foreign companies or make inroads into the complex commercial arrangements prevailing in many EU markets.34Moreover, significant upgrading of infrastructure and management capacity will be requiredto realizethe economic transformation objectiveofturningCapeVerde into a regionalfishing center, since INTERBASE is not energy efficient and does not meet EU sanitary requirements (which prevents European fishing vessels from storing their catch before returning to Europe) and faces stiff competition from Las Palmas and Dakar. Reforms are therefore required in the sector to seize the opportunitiesthat it offers, notably to address the challenges faced by INTERBASE, reduce small-scale fishing effort, promote alternative livelihoods to fishing, and adjust industrial fisheries to their commercialpotential. 40. The country's important infrastructure and growth agenda will require effective environmentalmanagement to ensure that development is sustainable. As noted earlier, CapeVerde has experienced some success in increasingforest cover. At the same time, its limited institutional and supervisory capacity and shortcomings in enforcement of environment-related legislation represent a concern. For example, inappropriate sewage and solid waste disposal or inadequate phytosanitary controlson handlingof foods can underminethe tourism industry. Despite the general robustnessof the environmental regulatory framework, there is a need for a substantial increase in human resources and capacity at the levelof the country's environmental directorate to ensure adequate implementation of the ongoing Second National EnvironmentalAction Plan35and to enforce environment-related legislation. 34Cape Verde has a number of international fisheries agreements with international bodies and with the EU, Japan and a number of African countries. The fishing licenses issued to EU flag vessels in 2008 are expected to yield 325,000. Licenses to Japan yielded US$144, 000 in2007, and US$164,000 are forecast for 2008. 35The Second National Environmental Action Plan has a 10-year horizon (2004-2014). Its general objective is to provide the country with a strategy that promotes a rationaleuse ofnatural resourcesand a sustainable managementof economic activities. 16 Other challenges include: (a) the sustainable management of natural resources to minimize the negative impact of growth on the environment; (b) the promotion o f more environmentally friendly solutions such as investing in wind and other renewable energy sources; (c) addressing the lack of water, sanitation, urban planning, and protection of coastal zones; (d) containing the loss of biodiversity; and (e) curbing illegal sand extraction and use for cement, since this both destroys coastal zones and can lead to salt-water contamination of scarce freshwater aquifers. 3.5 ENHANCING SOCIAL COHESION 41. With the strong recent gains in poverty reduction, the timing is now appropriate for implementinga better targeted social assistancestrategy. As poverty has been reduced dramatically during the last 20 years, the Government can consider targeting social assistance resources more closely to the poor instead of providing transfers and benefits to a large share of the population that needs these transfers less than before. There are still pockets of poverty, especially on some of the islands (see Appendix 5), and this poorer population is especially vulnerable to the deceleration in economic growth associatedwith the global economic Also, the cost of universal programs such as school lunches is high for the Government and earlier support for such interventions, such as from the World Food Programme, is drying up as the country has achieved MIC status. Cape Verde has the technical capacity to implement targeted intervention and has begunto evaluatethe meritsof alternative approaches. 42. While promoting social solidarity is an importantaspect of the Government's strategy, the existing instruments used by the Government to achieve that goal fall short of expectations. The Government has attempted to increase the effectiveness of social policies via a combination of decentralization and community involvement or community-driven initiatives that draw on the country's well-organized community-based organizations. These principles are at the core of the new National Program to FightPoverty (PNLP). Yet good quantitative data on the impact and cost effectiveness ofthis program are not available. There are also several direct cash transfers and a community-led small works scheme that provides a safety net for rural areas (known as Micro-realizap7esYwhich has replaced the former rural public works program, known as FAIMO). In addition, various institutions provide support for schooling for disadvantagedstudents and income-generating activities for single mothers. While these individual programs may be useful as mechanisms to protect the poor in times of crisis, they are not sufficient and do not constitute a coherent social protection strategy. Furthermore, their targeting performance is not well documented. A much more systematic approach would be needed in terms of planning, coordinating, monitoring and evaluating safety net programs. 43. Implementinga conditional cash transfer (CCT) programcan helpto improvethe targeting of social assistance and have a greater impact in terms of poverty reduction. There are several reasonsthat militate infavor of a CCT programaimed at increasing secondary enrollment rates among the poor: econometric analyses show that the returns to education become significant only with a secondary education, suggesting that a primary education is not enough to emerge from poverty; costs are a key obstacle for sending children to secondary schools, especially for the (poorer) rural population; unlike primary school education which is quasi-universal, there are very large differences in net secondary enrollments between the poorest and the richest quintiles?' investment in secondary education is needed for Cape Verde's economic transformation to a competitive service economy, and secondary education provides youth with mobile human capital that they can use anywhere in the country, especially in areas where job prospects are most attractive. Experience from a range of Latin American countries suggests that CCT programs can be highly effective both as short-term transfer mechanismsto reduce poverty and 36 The evidence on the recentfoodpricecrisis suggests that householdsinthe poorestareas were affectedthe most. 37 Childrenfrom better off households are twice as likely to go to secondary school as childrenfrom the pooresthouseholds. 17 as long-terminvestmentsto reducethe transmissionof povertyfromone generationto the next. Although no decision hasbeenreachedon CCT mechanismsin CapeVerde, the approachis beingstudied. 44. Another key area inwhich social cohesion can be strengthened is social security. The system as a whole is very young demographically, and there are more than ten contributors for each current benefit recipient, so that early measures to promote changes will greatly reduce the long-term costs of reforms. For example, the coverageof contributingmembers by the NationalInstituteof Social Security (INPS) is fairly limited, at one-quarter of formal sector employees, although the number of beneficiaries under the non-contributorysolidarity support has been extended. In addition, while its defined benefit pension plan is well funded, its medicalcoverage is under-financedand drives up total contributionrates to well above 20 percent, which is prohibitive for many employers and thus constrains formal sector employment. Third, the INPS surplus (of about 2 percentof GDP) and its accumulationofreserveshave in the past encouraged governments to press the INPS into purchasing Government bonds to finance budget deficits. As a result, the INPS investment portfolio is heavily weighted towards non-tradable Government bonds, which has a direct effect on the long-term finances of the scheme. Therefore a reviewof investmentpoliciesis warranted. 45. The Diaspora also plays an important role in the country's social cohesion and should be able to further its impacton development. CapeVerde's remittancesaccount for close to 10percent of GDP. These remittances have been instrumental not only in boostingincomes in the country but also in insuring against volatility. A large share is channeled into local investments indirectly via banking system deposits that are on-lent to domestic enterprises, while the other main use of remittances is to increase and smooth household consumption. Proposals have at times been floated to encourage recipients to use more of their remittances to finance income-generating activities instead of consumption-ven though the persons in charge of remittance expenditure often lack entrepreneurial skills. More fruitful alternative ways to draw on the Cape Verdean Diaspora may be to create niche markets for the sale and marketing of typically Cape Verdean products, and to facilitate knowledge transfers to localentrepreneursfromthe skilledworkers andentrepreneursinthe Diaspora. IV. CAPE VERDE'S DEVELOPMENT STRATEGY AND PRIORITIES 4.1 CAPEVERDE'S VISION OFECONOMICTRANSFORMATION 46. Cape Verde's development is guided by the vision of the economic transformation of its economy in a way that takes advantage of its geo-strategic position as well as its natural and cultural assets. This visiontranslates into a strategy to promote Cape Verde as a multi-purposeservice centre, with a combination of hub services for transshipment and distribution, fish processing and financialservices, in additionto buildingon its growingtourismbusiness. The EconomicTransformation Strategy (ETS), which was grounded in extensive dialogue early in 2001, is at the foundation of the country's earlier GPRSP for 2004-07 and its current strategy for 2008-11. If focuses on ensuring consistent broad-basedgrowthby expanding and diversifyingthe nation's productivebaseand deepening reformsand investmentsto builda more competitive economy. 18 Box 2. Cape Verde's Economic Transformation Strategy The key elements of the ETS focus on building upon Cape Verde's location to explore natural competitive advantages while using textiles and tourism as a bridge in the near term. The comparative advantages include: (a) its location as a gateway to Africa; (b) the sea, and CapeVerde's potentialwith its deep water ports as a hub for transshipments, its marine resources and fisheries, and its beaches and climate for tourism; (c) `air space' with air cargo, passenger transportation, refueling, stopover duty-freeshopping and air traffic control; (d) its good governance for its investmentclimate; (e) its strategicpartners,for market access andtrade relations, and (f)its relativelyskilledhumanresources for use in high-tech, high-endservices. The transformation strategy envisages development of several industry clusters around the sea, including processing and marketingof marineresources for export in the sub-region, as well as havingCape Verde serve as a transshipment port. The strategy also proposes the development of an offshore services industry to support the above-mentioned programs and to provide support services such as IT outsourcing, finance, investment and insurance to the Lusophone and African markets. It also aims to attract increasinglyhigh value-addedtourism. Maximizing these advantageswill require(a) massive investments in infrastructuredevelopment to attract investors, particularly to tourism, (b) non-traditionalsources of financing and increasedprivate sector development, and (c) building humanresources capacities and skills (that are specializedandhigh technology) to fully develop an informationand services economy. 4.2 CAPEVERDE'S GROWTH AND POVERTY REDUCTION STRATEGY FOR2008-11 47. The overarching objectives of the GPRSP-I1 are to reduce unemployment to below 10 percent, attain an accelerated real economic growth rate above 10 percent, and cut poverty by half?' The four-yearGPRSP-I1draws onthe ETS as well as strategic documents suchas the Government Programandthe `Grand Options ofthe Plan', and maintainsthe thrust ofthe earlier GPRSPwhile putting greater emphasis on infrastructure and privatesector developmentto support growth and reduce poverty. The specificactions are broadlygroupedunderthe same five strategic pillarsas for the first GPRSP: 9 Pillar 1: Promote Government Reform. The objective is to: modernizethe publicadministration; design and implement better managementpractices in public finances; advance with decentralization, and undertake civil service reforms to streamline the administrative structure and upgrade human resource management and capacity building. The goal is to ensure effective, accountable and transparent support to citizens within solid democratic institutions. The Government also aims to align spending allocationsmore closely with GPRSP-I1priorities within a medium-term framework that emphasizespublic investment for growth. 9 Pillar 2: Develop Human Resources. The objective is to develop more competitive human resources,with advanced levels of scientific, technicalandtechnologicalknowledgeandthe requisite skills for the services industries, while ensuring very broad access to educational opportunities. A key objective is to increase employment, especially for youth, and to strengthen Cape Verde's competitiveadvantage at a globallevel. 9 Pillar 3: Competitiveness - Meeting the Challenges of Sustainable Development and Globalization. The objective is to pursue reforms and investments that ensure macroeconomic stability as a prerequisite for sustainable competitiveness, growthand developmentinthe country and to strengthen productivity, the quality of services, opportunitiesfor employment, regulatorycapacity andthe business environment. 9 Pillar 4: The Country's Economic Infrastructure. The objective is to increase investment in infrastructure to meet the daily needs of its citizens, to overcome infrastructure bottlenecks, and to keeppacewith the fast growingtourism industry, inpartnershipwith donors andthe privatesector. 38The Joint IDA-IMF StaffAdvisory Noteon the GPRSP-I1(ReportNo. 43927-CV)was discussed by the Boardon July 8, 2008. 19 9 Pillar 5: Strengthen Social Cohesion. The aim is to substantially reduce poverty by reducing unemployment, improvingaccess to microcredit, enhancing labor conditions, extending the coverage of the social protectionsystem, strengthening food security, ensuring better health services for all, supporting youth development and integration into the economy, and promoting the gender dimension. This would includethe provisionof a moredecentralizeddelivery ofsocialservices. 48. Cape Verde's program under GPRSP-I1 is costed at 82 billion Cape Verdean escudos, approximately equivalentto one billion US dollars. More than half of this amount is guaranteedas it correspondsto the consolidated budget approvedfor 2008. The gap of US$460million over 2009-11will be sought from external and internal sources, notably multilateral and bilateral donor assistance. The largest share ofthe programis for infrastructure(50 percent), followedby humancapital development(19 percent), good governance (11 percent), competitiveness (8 percent), social cohesion (7 percent), and cross-cuttingissues, includinggender andenvironment(5 percent). 4.3 CAPEVERDE'S INTEGRATIONINTHE GLOBAL ECONOMY 49. Cape Verde entered a Special Partnership Agreement (SPA) with the EU inNovember 2007 and accededto the WTO in July 2008. The SPA focuses more on politicaldialogue, policy convergence on issues of security, stability, migration and regional integration. It i s distinct from the Economic PartnershipAgreementsthat the EUis seekingwith signatories ofthe CotonouAgreement.39Cape Verde expectsthat WTO accessionwill attract higher levels ofFDI, strengthendomestic policiesand institutions for the conduct of internationaltrade for goods and services, enhance the ease and security of market access to major export marketsandprovideaccess to a trade dispute settlement me~hanism.~'Progressive liberalizationof the customs code by 2018 will, however, imply lower customs revenues, which account for a sizable share of tax revenues. In addition to these institutions, Cape Verde is a member of the African Union; the Economic Community of West African States, with which it coordinates tariff policies; the Community of LusophoneCountries, with which it has establishedcloser relationsnot only with Portugalbut also with Angola andBrazil;andthe PermanentInter-StateCommittee to FightDrought in the Sahel. While its main trading partners are EU countries, Cape Verde is seeking greater South- Southcooperationon bothknowledge sharingandtrade with nations rangingfromMauritiusto China. V. WORLDBANK GROUPPARTNERSHIP STRATEGY 5.1 LESSONS LEARNED KEYPRINCIPLESFORTHENEWPARTNERSHIPSTRATEGY AND 50. The Bank's FYO5-OS CAS was broadly implemented as planned and contributed to the envisioned outcomes in line with GPRSP objectives. The shift to increased budget support bolstered the reform program and strengthened country dialogue, donor coordination and harmonization. The portfolio includeda good mix of IDA investment operations that supported activitiesto complement the policy reform program supported by the PRSC series and the AAA program that was implemented reflectedCAS priorities(see Appendix 2). ''CapeVerde is amember of the EU's Cotonoupartnershipwith 79 African, CaribbeanandPacific(ACP) States. Sincesome of the trade preferencesunder the partnershipdo not meet WTO requirements, the EU is seekingto enter into EPAs with the ACP signatories. The EU is hnding projectin Cape Verde under the `Special Partnership' out ofthe 5lmillion earmarkedfor Cape Verde over 2008-13 under the 10thEuropeanDevelopmentFund (EDF) -the funding part of Cotonou. The EU has agreed that CapeVerde be apilot for the EU's new `Partnershipfor Mobility'. 40The need to introduce reforms relating to industrial and intellectual property rights explains the long duration o f the negotiations(9 years). In recognitionof the economic impact that membership may have on the country, Cape Verde will have until 2018 to meet all of its WTO convergence targetswhich will involve new legislationon commercial, customs and copyright law, andon healthregulation. 20 51. The main lessons that the WBG can draw from previousstrategies are that: In light of the pressingneedfor investment in infrastructureand the Government's fiscal constraints, the WBG program should help Governmentto leveragefinancingfor infrastructurevia public-private partnerships. In the energy sector, which experienced a failed PPP, a new approach needs to be developed for the sector, namely one that promotes effective management and places greater emphasison alternative, renewable sources of energy. Some risks were not anticipated, such as the combination of the failed PPP in energy, municipal arrears, and the weakness of the regulator for the energy and water sector, which weakened Electra and createdadditionalcontingent liabilitiesfor the State. The development partners should have a clear strategy for building public and private capacity as weak capacity continues to present a constraintto effective implementation of Governmentprograms andprivatesector activities. The Governmentexperienceddifficultiespreparingthe MTEFanddelays setting upthe M&E system, althoughbothwere neededfor better planningandmonitoringof GPRSP-I1and of CAS results. Given Cape Verde's economic vulnerabilities, development partners, including the WBG, should continue to provide Cape Verde with access to concessional financing and maintain other special economic arrangements to help the country make a smooth transitionto middle-incomestatus and ensure that the developmentgains are notjeopardized. The joint budget support program has been very effective in advancing the reform agenda and coordinatingdonor support. The WBG should continue efforts to strengthen donor harmonization to ensure synergiesandreducetransactioncosts for CapeVerde's Government. The Bank needs to have more direct outreach to non-government actors, including Parliament, civil society and the private sector. There is also a need for greater responsiveness to Government's requestsfor TA. 52. The CPS will be guided by the principles of selectivity, partnership, and a broadeningand deepening of the Bank's relationship with a new MIC client. The selectivity of the Bank's support across and within sectors is designedto achieve a more transformative impact. To this end, for example, the Bankwill assign its entire IBRDportfolioto the energy sector (see Section 5.3), andthe International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) are ready to support the sector as well. The Bank will also seek partnerships with other donors with a view to ensuring continued donor coordinationofbudget support underthe auspices of the Budget Support Group (BSG) of donors, but also, where feasible, coordinated and harmonized support on sectoral investments. Moreover, with Cape Verde's graduation to blend country status, the WBG will offer a considerably broader menu of technical and financial support, ranging from the ongoing IDA, AAA and trust fund support to include IBRD lending; an expanded IFC program for trade finance, SMEs and PPPs; MIGA and IBRD guarantees; new hedging products; specialized technical assistance, for example on debt management; and facilitation of South-South Exchanges. Indeed, the WBG will offer more knowledge services designed to build capacity and inform policy dialogue in the country. TA such as that being providedbythe Treasury Department couldevolve into fee-basedanalyticalandadvisory services. 5.2 CPSOBJECTIVESAND STRATEGICPRIORITIES 53. 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 would provide technical and financial support to: (a) promote good governance and public sector capacity; (b) improve competitiveness and the investmentclimate for privatesector-led growth, and (c) strengthen humancapitaland social inclusion. These three areas are discussed indetailbelowandrelated indicators and areas supportedby donor partnersare detailedfurther inthe resultsmatrixinAppendix 1. 21 StrategicPriority One: PromotingGood Governanceand PublicSector Capacity 54. This strategic priority is aligned with Pillar Iof the GPRSP-II on GovernmentReform,and will focus on three CPS outcomes. These are: (1) reduced and better managed liabilities; (2) strengthenedmanagementof public resources at central and local levels; and (3) strengthenedregulatory and oversight roles for the public administration. This pillar is important as it drives macroeconomic performance, the efficientuse of publicresourcesandtherefore also the successof reforms in other areas. Moreover, progress in this area will be essential as Cape Verde transitionsto a MIC and also assumes greater responsibilitiesin light of its integrationinthe WTO and its SpecialPartnershipwith the EU. CPSoutcome1.I:Reducedand better managed liabilities 55. The new PRSC series will continue to support macroeconomic and fiscal stability, a condition for sustainablegrowth. The series will support further clearance of past arrears accordingto the plan initiatedin2006 which ensuresthat no new arrears are created. Inaddition, as Electraremains a major fiscal risk, a time bound action planwill be articulatedto clear the company's arrears to suppliers. This will complement work carried our bythe IMFunder the PSI, includingsupport with macroeconomic monitoring. In addition, the Bank can provide TA for contingency planning in light of the country's vulnerability to the impactsofthe globalcrisis. Supportwouldbecoordinatedwith donors inthe BSG. 56. To preserve debt sustainability and strengthen debt management, the Bank and the IMF will extend their technical assistanceon debt management. A joint WB/IMF team undertook a Debt ManagementPerformanceAssessment exercise (DeMPA) and needs assessment in February 2009 and is providing TA on the T-bill auction system. A medium term debt management strategy mission will follow in April 2009. The maingoals are to improvethe quality andtransparency of public debt statistics; assess the adequacy of the legal and institutional framework for conducting and recording debt operations; ensure coordination between Treasury debt operations and the Central Bank's monetary operations; perfect the T-bill auction and develop the domestic market for Government securities, including the choice of software for the auctioning of Treasury securities, and design and implement mediumterm debt strategy. CPS Outcome 1.2:Strengthenedmanagement of public resources at central and local levels 57. The PRSC series will support the implementation of State reforms and of the State restructuring plan, including greater decentralization, strengthened municipal management and merit-based civil service reforms. The Authorities have embarkedon a government reformdesignedto improve good governance. Key elements of the reform include the rationalization of government structures, modernization of the public administration, transparency in the management of public resources and decentralizationfor a leaner, more efficient and more effective public sector. The first phase of implementation has started and is progressing satisfactorily. By harmonizing ministerial structures and integratingthe various governmental representationsat the regional level, the Authorities now hope to better coordinate their activities and benefit from economies related to the streamliningof structures. Decentralizationof responsibilitiesand resources to municipalitiesis Cape Verde's preferred means of improving service delivery. Implementinga merit-based civil service reform and increasing mobility within government and outside, and conducting careful analysis of the fiscal impact of the decentralization and new career and salary system, will also be important. Support in these areas would be coordinatedwith other BSGmembers. 22 58. Support for improved fiscal management and the comprehensive Public Financial Management(PFM) action planwill be providedprimarily through the PRSC series. An update of the PFM action plan will draw on the 2008 PEFA results as well as the findings of the latest CFAA evaluation and 2008 PER update, and on work done by IFC's PEP-Africain 2007 on drivers of growth. The Bank may undertake a targeted PEWCPAWCFAAanalysis to underpin the reform program. The key areas for increased focus include advancing on the public procurement modernization reform and implementingthe new procurementcode; oversight of fiscal risk from public sector entities; ensuring the effectiveness of audits; strengthening medium term budgeting and planning; advancing with the framework law on decentralization to ensure increased transparency in the transfer of funds, and enhancing PFM capacity at decentralized levels. This would be done in partnershipwith the donors on the BSG, who are supporting PFM in a coordinated way. For example, AfDB is leading the work on budget planning and allocation, while the Spanish cooperation is supporting the national procurement system, includingthe establishmentofthe PublicProcurementRegulatoryAuthority (ARAP). CPSOutcome1.3: Strengthenedregulatory and oversight rolesfor thepublic administration 59. The Bank will provide operationalsupport together with the PRSC series, in coordination with other donors, in order to strengthen technicalcapacitywithin the public administration. This support would include such areas as procurement, internal audit skills in central Government as well as technicaland managerial capacity at the municipallevel. A Growth TA and SME Support operation is proposedthat respondsto Government's requestto provideCape Verde with support to articulate, design and implement reformsthat promotegoodgovernance and efficiency. 60. The Bank will contribute to strengthening a national monitoring and evaluation (M&E) system as well as statisticalinformationand analysis. The nationalM&E system is quite ambitious as it is designedto be an integratednationalsystem coveringall sectorsthat would enable government-wide monitoringof outcome indicators for all projects/programsin all sectors. Progresshas beenmade on the system but it is not yet fully functional. Given the importance and complexity of the national M&E system, the Bank, alongwith the BSG, will preparea needsassessmenton results-basedmanagementand M&E that should inform a comprehensive capacity building plan. The MCC is also supporting the nationalM&E system. With regardto statistics, the National Statistics Institute(known as NE) ensures harmonization, integrationand dissemination of demographic and social statistics, and gathers scattered sectoral information to provide it in a useful format to public and private agencies. It oversees the StatisticalAgenda, Cape Verde's nationalstatisticaldevelopmentplan, which is progressingslowly. The Bank and the Swedish cooperation will provide support to INE, in the Bank's case with a particular emphasis on ensuring that data are available on key sectors that the Bank is supporting, such as tourism and infrastructure. StrategicPriority Two: Improving Competitivenessand the InvestmentClimatefor Private Sector- Led Growth 61. This strategic priority is aligned with Pillar III on competitiveness and Pillar IV on infrastructure of the GPRSP-11, and will focus on two CPS outcomes. These are: (1) an improved business climate; and (2) improved access to and quality of key economic infrastructureservices. The two GPRSP-I1 pillars and the related CPS outcomes are at the core of the country's economic transformationagenda. CapeVerde's infrastructureand basic servicesare also under pressureto meetthe demands andopportunities ofthe rapidlygrowingeconomy. 23 CPSoutcome2.1:Improved businessclimate 62. The Bankwill support policy and regulatoryreforms to reduce businessconstraints, via the PRSC series and the Growth TA and SME Support operation. The Government's Casu do Cidudco has been extremely successful in launching four modules: (a) obtaining birth, death and marriage certificates; (b) creating a company in one day; (c) obtaining a unified automobile document; and (d) facilitatingelectronic payments.At the same time, further reforms are requiredto bringdown the cost of doingbusiness and ensure effective,transparent, participatoryand operationallycheap access to services. These could include Doing Business-related reform as well as trade restrictiveness reforms, such as streamliningCustomsproceduresfurther, or the carefuldesign of rationalizedand focusedtax incentives, drawingon the conclusions of the recent DiagnosticTrade IntegrationStudy (DTIS). The IFC designed the Millennium Challenge Corporation's (MCC's) Private Sector Development program, which will be implementedby a public-privateoversightbody inCapeVerde andwill includecomponentsto strengthen localentrepreneurship, improveaccess to finance for SMEs, strengthenlinkagesinthe tourismsector, and address other constraints to domestic investment. IFC will directly implement the credit bureau component of this initiative, and will further seek to support local financial institutionsexpanding their business lendingoperations. 63, Increasing competitiveness in the financial sector, including by strengthening supervision and regulationof banks, will support the private sector. Basedon the findings ofthe recent Financial SectorAssessment Program(FSAP) exercise, the Bankproposesto support a revisionofthe microfinance law, help strengthen the off-shore banking regime and the Central Bank's supervisory capacity, and enhance creditors' rights to improve access to credit, including potentially by strengthening the real property registrationcode and registries. The instruments for this would include the PRSC series, the Growth TA and SME Support operation, which would also address access to finance issues for SMEs, and possibly a short term post-FSAP assistance task. Bank support will be complemented by the IMF PSI'Sfocus on AMLKFT, for which new legislationhasbeenadopted. 64. Cape Verde needs to review and realign its tourism strategy to keep its destination competitive with other markets and supply a differentiated product. A comprehensive strategic vision (tourism master plan) is a critical first step. In addition, it will be important to strengthen coordinationamong Government institutions around tourism activities and to adapt the regulatory and legal framework to attract high quality FDI and enhance local content. Another key concern of the Government is to strengthen linkages between the tourism industry and local communities, so as to increasedomestic value added, create morejobs andextendbenefits fromthis industrybeyondthe islands on whichtourism is concentratedat present. The GrowthTA and SME Support operation couldbe used to providesupport in some ofthe above areas. 65. Improving land management use is critical not only for the tourism sector but also to address rapid urban expansion and environmental challenges. The Bank, along with Austria and Spain, will support the Governmentintackling constraints relatedto landby addressinglandregistration, ensuring effective legal protectionof propertyrights at a reasonable cost (which is essential for tourism investments and other FDI), and dealing with rapid urban growth. The implementation of the new Cadastre Law and systematic planning on all islands represent decisive steps for ensuring competitiveness. Additional areas for development include enhancing the effectiveness of real estate taxation and completing both municipal planning and island-level plans. This would help to address populationgrowth, mobility, and urban expansionvia improved land managementand better planningof infrastructure. The PRSC series and the GrowthTA and SME Support project provide the vehicles for policydialogue andtechnicalsupport onthese issues. 24 CPSoutcome2.2: Improved accessto and quality of key economic infrastructure services 66. The CPS will contribute to easing infrastructure bottlenecks in two key areas, namely energy and water on the one hand, and transportation, with a focus on roads, on the other. The dedication of the entire IBRD envelope under the CPS to the energy sector is intended to achieve a significantbreakthrough in the sector. Similarly the assignment of further resources to the road sector, building on an earlier operation and its additional financing, is intended to complete the sustainable upgrading of the core road network and focus on integrationof that networkwith sea and air transport. The IFChaspreviouslyfinancedthe mobiletelecommunications sector, andwill seek to expandfinancing to this and other infrastructureareas, notably energy, that are beingdevelopedby the privatesector. 67. The Government and Electra plan to increase power generation capacity significantly, and the Bank would support this while also supporting stronger management and regulation of the sector. The additional generation capacity requiredpresently is estimated at about 30 megawatts, which i s equivalent to 35 percent of installedcapacity. This i s needed for reliable coverage for households as well as for the manufacturing and hotel industries, IT services and cold storage facilities. Investment lending by IBRD will support Electra's financial recovery and modernizationand support its business plan and investment program, includingnew investments in renewable energy, notably wind and hydro power; as well as water and sanitation services. A PartialRisk Guarantee from IBRD would be usedto attract investors to invest in renewable energy, including the ongoing windmill parks project. IFC has financed an analysis of potentialprivatewind power projects, andwouldbe able to finance viable projects emanating from these efforts, provided the sectoral imbalances are also corrected. IFC envisages potential financing to private power production projects. As the Bank budget support shifts to the infrastructureand privatesector development agenda, the CPS will seek to promote a stronger regulatory framework for energy and water pricingand relatedmeasures. The Bank will continue to support major reforms through ongoing policy dialogue under the PRSC instrument and TA. The Public-Private Infrastructure Advisory Facility (PPIAF) is supporting the preparation of energy sector development policy and technical assistance to the Economic RegulationAgency, ARE, for it to facilitate sustainable public-privatepartnerships. Further TA is being provided to prepare a strategy for Electra's financial recovery. The AfDB is providingcomplementaryassistancethroughits electricityprojecton Santiago. 68. In transport, the Bank's focuswill be on effectively implementingthe AdditionalFinancing for the ongoing road sector support project and preparinga new transp,ortsector operation. The latter operation will complete the core road network, while the prioritization of additional roads for investment would be basedon (a) potential for enhancing tourism opportunitiesfor the main roads, and (b) providingaccess to poor and isolatedcommunities (basedonpopulationdensities) for the rural/feeder roads networkusinga least-cost approach.41The transport operation will also buildinstitutionalcapacity for maintenance, and assess the multi-modaltransport systemand inter-islandlogisticsplanningcapacity. With most external trade passing through sea ports, the economy is critically dependent on intermodal transport. Coordinationbetween air, sea (ferry) and road transport needs to be assessedto identify the bottlenecks to be removed in support of tourism and inter-island connectivity and travel. A stronger capability in supply chain management and transport logistics may help boost manufacturing competitiveness, bothat the levelof the firm andthe economy. A logisticsstudy, possiblyfunded by the PPIAF, will be preparedto inform future work in this area. In addition, the PRSC series will support policy reforms that ensure the sustainabilityoftransport sector investments, suchas ensuringthat the road maintenance fund is fully established and adequately financed. The ongoing IDA growth and competitivenessprojectwill continueprovidingtechnical assistancefor the privatizationof ENAPOR, the Port ManagementCompany, and TACV, Cape Verde's NationalAirline. Improvingport managementis 4'Data from the census and the poverty map would be used to assess where to invest in roads by taking into account not only population density and poverty, but also the economic and social potential ofvarious types of investments. 25 essentialto enhancethe economic performanceofthe transport chainwhich in CapeVerde nearly always involves maritime transport. The Millennium Challenge Account (MCA) and Luxembourg are supportingthe transport sector as well. 69. The CPSwill support the Authorities in reassessingoptions in the fisheries sector.The FY07 fisheries sector report notedthat the potentialof the fisheries sector is limitedand in most cases resources have been fully or over exploited. The proposed West Africa regional fisheries project will aim at (a) strengtheningfisheries governance, (b) reducing illegalfishing, and (c) increasinglocal value addedfrom maritime resources. The sector report and the planned country strategic investment framework (CSIF) will contributeto the analyticalunderpinning of the country operation. Support on fisheries is also being providedby the JapaneseGovernment. 70. The CPS will ensure that the support for infrastructuretakes due care of the environment. To ensure that investments in infrastructureare consistent with a sustainable natural environment, in collaboration with other budget support donors, the Bank will support the Authorities in developing a policy framework for an environmentally sustainable tourism strategy. Assessing transparency in the pricing, allocationand management of public land is also neededto safeguardthe environment and fiscal assets, and couldbe supported, in conjunctionwith the tourism strategy, under the GrowthTA and SME Support project. In addition, in collaborationwith other development partners, the Bank, through the TerrAfrica partnership, will support the preparation of a sustainable land and water management CSIF that will identifypriorityareas for intervention. StrategicPriorityThree: Strengthened Human Capital and Social Inclusion 71. This strategic priority is aligned with Pillar I1 on human capital and Pillar V on social cohesion of the GPRSP-11, and will focus on two CPS outcomes. These are: (1) better alignment of technical and vocational education and training (TVET) graduates' skills with labor market needs, and (2) improvedtargetingof public expenditures and specific programs. The two GPRSP-I1pillars and the related CPS outcomes are fundamental to reduce unemployment and strengthen social cohesion by reachingvulnerable groups with effectivelydesignedprograms.42 CPSoutcome 3.1: Betterpositioning of the educationand TVETsectorsfor labor market needs 72. In order to assist Cape Verde in developing a demand-driven TVET system, the Bank will continue to supervise TVET activitiessupported by the Dutch Cooperation. The Dutch cooperation has entered into an agreement with the Bank to monitor a 9 million budget support grant over 2008- 2011. Activities will aim at developing in-countryinstitutionalcapacity to steer a broad TVET program, supplyingtraining opportunities geared towards labor market demand, and ensuring that an employment observatory is in placeandproducesreliablestatistics. 73. The Tertiary Educationin Africa Team (TEIA) will support Cape Verde to increase access and equity at the tertiary education level. TEIA's support will focus on strategic priority disciplines for the country's developmentand develop short term professional trainingthat meets the labormarket's needs, while also addressing the sustainable development of the overall sub-sector. The TEIA will undertakean assessmentofthe tertiary education sub-sector, focusing on financingandequityaspects and simulating the costs and sustainabilityof different policy options, so as to inform a policy dialogue on developing a sustainable and efficient tertiary education sector in Cape Verde. It will also share knowledge through Cape Verde's participationin workshops like the one scheduled for April 2009 on 42Cape Verde's objectiveis to reducecurrent unemploymentrate of 18 percentto less than 10percent in2012. This will require the creation of 12,000jobs per year indifferent areas of economicactivity. 26 short-term professional tertiary educationwith other African countries. The TEIA could also support the development of a center of excellence43in a priority sector, such as tourism, ifthere were a clear vision, strong buy-in, and solid training experience to draw on for such an institution. This would require IDA financingandpreliminaryTA to helpthe identifiedinstitutionto develop a solidbusinessplan. CPSoutcome 3.2: improved targetingfor public expenditures andspecificprograms 74. At present, only a minority of public resources that are intended to reach the vulnerable populationactually reach them, so improvedtargeting is e~sential.4~ The Authorities have requested Bank support to identify ways to better target their programs. Cape Verde is one of few countries in Africa where it may make sense to set up a proxy-means testingprogram, although geographic targeting usingthe poverty map that INE and the Bank constructed recently is also a possibility. The Bank can support Cape Verde with TA to determine optimaltargetingapproachesfor socialprogramsand subsidies for poverty reduction, and help to develop practicaladministrativetools for implementingthem.45The Bank can also help the Authorities to investigate the feasibility of implementing a conditional cash transfer program. Since a poverty map has already been estimated for the country and alternative proxy- means testing strategies have been calibrated in preparingthe Poverty Assessment, support for improved targeting could be providedvia the PRSC series. A common targeting system for multiple programs, rangingfrom utility subsidies to public works and minimumpensions, would bring down administrative costs for implementingthe targeting mechanismsinrelationto the outlays for the various programs. 75. An ongoing initial assessment of the labor market could lead to more in-depth and policy- focused advice on specific labor market constraints. An initial assessment of the labor market is currently examiningthe issue of misalignment between recent unemployment and GDP growth rates, whichpointto a labor-skillsmismatch. It aims to understandlabor market dynamics in key sectors ofthe economy, paying special attention to the demand side and drawing on a new enterprise survey. This work is also intended to providethe Authorities with the tools to monitor and evaluate the labor market outcomes of the new labor law. Follow-onwork could help the Authorities to address the issue of strengtheninghumancapitalor other priorityareas inrelationto labor. 76. The Bank Group's support for energy, water, transport and competitiveness will not only address growth and efficiency issues but also pay attention to the social inclusion of underserved groups. For example, the transport sector projectwould finance rehabilitationofthe rural roadsnetwork to support access to employmentand marketingopportunitiesfor ruralresidents;the proposedenergy and water sector support would address tariff and coverage issues with a view to improving access for underservedgroups; a key objective of the proposed Growth TA and SME Support project would be to increase opportunities for SMEs, and the IFC's PEP-Africahas designed a tourism linkage program to enhance opportunities for rural areas. One component, a marketingand reservations service for small, independent lodgingoperators, is currentlybeing implementedwith 35 firms participating. Thus there is an explicit aim to draw on the operations in the pipelineto promote social inclusioneven as they address growthandefficiencyissues. 77. The Bank will also finalize the implementationof two operations in June 2009 with strong social inclusion dimensions. The first is the IDA-supportedHTV/AIDSAdditionalFinancing, which has 43 The 2iE (international institute of water and environmentalengineering) in Burkina Faso is a good example of this kind of support. 44Source: draft Poverty Assessment for Cape Verde, 2009, basedon QUIBB data. 45 The Poverty Assessment currently under implementationwill provide an asset-based poverty trend and profile analysis that compares the 2001 and 2006 surveys; assess qualitative perceptions of poverty by the population; analyze basic trends in education, health, and employment indicators; and, drawing on a new 2008 survey, examine trends inmonetary poverty and the linksbetweengrowthandpovertyreduction, with afocus on the impact ofthetourismboom. 27 focused on outreach to vulnerable populations to increaseawareness, as well as on the provisionof anti- retroviral treatment for persons living with W/AIDS-Cape Verde's successful application to the GlobalFund for support will ensure some continuity in that regard. The second is a JSDF-fundedgrant for access to justice for vulnerable women. With a view to promoting social equity more broadly and gender equity in particular, this project has developed 11 "Legal Centers" on various islands to provide one-stop legalservicesincludinglegal advice andrapidpeacefulsolutionsto everyday disputes. 5.3 DELIVERING THE CPSPROGRAM 78. The indicative IDA 15 envelope for Cape Verde is SDR27 million, equivalent to US$40 million, and the first year of IDA 16 (FY12) is taken to be in line with IDA 15. On this basis, the overall indicative IDA envelope for the CPS period is estimated at US$51.5 million.46 If Cape Verde participates in the Regional Fisheries Project, the country IDA allocation of US$1.5 million .would leverage an additional US$3 million from the regional allocation for this project, and an additional US$1.5 million from the GEF, for a total investment of US$6 million. There will be some front-loading or back-loadingof the IDA15 envelope across years since new IDA commitments are expected to be concentratedin FY10. 79. Cape Verde will also access IBRD resources during the CPS period. In October 2007 the Bank establishedthat Cape Verde is creditworthy for IBRD lending. Onthis basis, Cape Verde will be a blend borrower, accessing both IBRD and IDA financing under this CPS.47 The ceiling on IBRD commitments during the four-year CPS period has been set at US$54 million. Cape Verde intends to draw on the IBRD financing envelope as follows: (a) a US$41million energy investment operation; and (b) a US$11.8 million IBRD guarantee for the wind farm electricity. The IBRD resources will be contingent upon continued satisfactory performance of economic management indicators (macroeconomic management, fiscal policy, and debt policy) of the CPIA. The proposed pipeline is presented in Table 3. Since the new IBRD support complements an increased IDA program, the Bank will bededicatingadditionaladministrativeresourcesto deliverthe expandedprogramfor CapeVerde. 80. The Bankwill concentrate its financial resources in selected areas within the three pillars of the CPS so as to achieve transformative change. This impliesfocusing resourcesin a sector over time until a transformation point is reached beyond which the sector is elevated irreversibly to a higher functioning level. For example, the full IBRD envelope of US$52.8 million will be assigned to the critical energy sector and build on previous assistance inthat sector in order to support decisive change. The PRSC series of around US$10 million per year over four years will focus on governance and competitiveness reforms and build on the previous PRSCs and the ongoing Growth and Competitiveness operation in order to reinforce this priority area. New IDA-and GEF-financed investment projects totaling US$13 million over the next four years will also address governance and competitiveness reforms, as well as bolster support through the ongoing Road Sector operation so as to achieve transformative changevia continuingand enhancedsupportto the transport sector. A fisheries operation, 46The actual IDA allocationfor Cape Verde may vary annuallyon the basis of (a) the country's performance as assessedvia the Country Policy and Institutional Assessment indicators and the performance of the Bank's portfolio in Cape Verde; (b) the country's performance relative to the performance of other IDA countries; (c) overall resources available to IDA during the IDA16replenishmentperiod; (d) changes in the list of active IDA-eligible countries, and (e) lendingterms for which CapeVerde qualifies under the IDA 15 grant eligibility and allocation framework. Any fluctuations in the annual IDA allocationswill be reflectedin an adjustmentof financingfor either budget support or investment operations. Incrementaladditionalresources that may become available would be usedto top up investment operationsor, ifwarranted, to alleviateexternalshocks. 47Cape Verde met two of three criteria for MIC status, namely the cut-off for the country's income per capita (estimated at US$2,130 in 2006) and the Human Assets Index (level o f human development), but Cape Verde lags on the third criterion, namely the EconomicVulnerability Index(EVI). 28 which draws on earlier AAA in the fisheries sector, would strengthen governance, efficiency and sustainability in the sector as part of a regionalinitiative. The proposedprogram of lendingbuilds on an existing well-performing portfolio of three operations totaling US$48.5 million that is well-aligned with the CPS objectives. With the IDA and IBRDenvelopes already determined,the timing of delivery of the Bank supportandthe mix betweenbudgetsupport and investmentoperationswill be the key tools that the Bankwill have at its disposalto adjust to changingeconomic and socialconditions inthe country. Table 3. IndicativeIDA and IBRD FinancingEnvelope and Programfor FY09-12 Sourceof Financingand Projectname I Plannedfinancing US$million I IDA 15 IDA 16 I FY09 FYlO F Y l l FY12 IDA Total 51.5111 - PRSC IV -VI1(annualbudgetsupport) 10 10 10 10 Transport Sector Support- SIL 5 GrowthTA and SME SupportProject-SIL 3.5 Investmentoperation to be determined 1.5 RegionalFisheriesProject* 1.5 IBRD -Total 52.8111 Energy Sector Support Operation 41 Energy Sector PartialRisk Guarantee 11.8 GEF -Total 1.5m RegionalFisheriesProject 1.5 81, While the Bank Group's financialassistance is designed to be selective, the AAA program is designed to be flexible, so as to respond promptlyto Government requests for highly technical non- lending support. The Bank will undertake a Poverty Assessment and an FSAP in FY09 and work towards an initial labor market assessment. In subsequentyears, it will prepare one full PERplusjust-in- time policy notes to address key issues that may arise, for example in relation to the global crisis, procurement-relatedreforms or aspects of the reform agenda in the country's Economic Transformation Strategy (see Table 4). Efforts will be made to ensure that findings are internalized and translate into actions and results by incorporatingcarefully tailored engagement and disseminationstrategies into AAA. FY09 FYlO F Y l l FY12 Poverty Assessment InitialLaborMarket 0 PER PolicyNote 0 FinancialSector Assessment A~essment PolicyNote PolicyNote ( F S W PolicyNote 82. Trust funded activities will be an important part of the Country Partnership Strategy. There are currently five active trust funds in the portfolio for a total ofjust over US$6 million of which US$3.7 million remain to be disbursed. They include support to the Supreme Audit Institution; TA for energy and water; support to public-private infrastructure, and access to legal services, and they are therefore closely aligned to the strategic objectives of the Bank's strategy. Additional support will be sought from such sources as the Institutional Development Fund, the Public-Private Infrastructure 29 Advisory Facility and the GEF. Resourceswill be used strategically to enhance Cape Verde's access to WBG support and will be brought to bear in particular on: (a) capacity buildingactivities in the area of debt and asset management; (b) facilitatingpolicy dialogue and capacity buildinginother areas in which the Bank does not have a lending operation, for example higher education, or in which there are insufficient lendingresources for capacity building, e.g. FSAP follow-up or tourism. In each case, the Bankwill pay attentionto the cost-efficiencyofmanagingthetrust funds. 5.4 IFCANDMIGAACTIVITIES 83. The International Finance Corporation's current investment portfolio in Cape Verde is limited,with a total of US$8 millionin investmentsin the telecommunicationsand bankingsectors. Going forward, the IFC Strategy will focus on opportunities to improve financing options for SMEs in Cape Verde, and public-privateinfrastructureprojects. In SME finance, IFC will expand current trade finance and credit lines with Caixa Econdmica, to other interested commercial banks. IFC will also explore the potential for other instruments to support increased access to credit for SMEs through the banking sector, such as portfolio guarantees. In infrastructure, IFC has been active in financing the expansion of cellular telephone networks, the main infrastructure sector attracting private investment. IFC will also seek to provide advisory assistance to the Government in structuring public-private partnershipandconcessionarrangementsin key sectors. IFC's PEP-Africaprogram, incoordinationwith IDA, has prepareda series of studies on the priorities for developing five key sectors for the economic transformation agenda (SMEs, finance, fisheries, maritime transport and tourism). This work was undertakento assist the Government and private sector in designingthe private sector component of the US-financedMCC, which signeda US$l00 million Compactwith CapeVerde in2005. 84. The Multilateral Investment Guarantee Agency (MIGA) does not currently have any exposure in Cape Verde. Nevertheless, MIGA is prepared to provide guarantees for private-sector led investments in infrastructureand to provideTA and advisory services to Cape Verde to structure public- privatepartnershipsthat are sustainable. 5.5 PARTNERSHIPSAND HARMONIZATIONWITHDONORS 85. Budgetsupport has catalyzed donor harmonizationaround key policy measuresand results in Cape Verde. In April 2005, a "Partnership Framework between Budget Support Partners and the Government of Cape Verde for the Provisionof Budget Support" was signed between the Government, IDA, the EU and the nether land^.^' Under this Partnership Framework, the Government and donors agreed to: (a) harmonize indicators and prior actions for budget support; (b) undertakejoint reviews of budget support, and (c) synchronizebudget disbursementswith the Government's budgetcycle in order to reduce the transaction costs of such assistance to the Government. With this agreement, which reflects Government's ability to coordinate donors around a key agenda, the Government and partners began to institutionalizeefforts to harmonizebudget support for GPRSP implementation. Since its inception, the Austrian Development Agency, Portugal, the Spanish Agency for InternationalCooperation, and the African Development Bank havejoinedthe Partnership Framework(see Table 5). The bi-annualreviews around ajoint, streamlined matrix that forms the basis for discussions and disbursements in the donors' respective operations have greatly reduced transaction costs for the client. The proposed PRSC-5, embedded in a three-year matrixthat will be agreedwith the authorities and donors, is beingidentifiedin consultationwith various stakeholdersunderGovernment's leadership. 48Cape Verde's major bilateral donors are Austria, Luxembourg, the Netherlands, China, Portugal and the U.S.A. The EU, ADB, UN,IMFand World Bank are the major multilateralpartners. 30 Table 5. EstimatedJoint Budget Support for CapeVerde 2008-2011 US$Million 2008 2009 2010 2011 AfDB 5.0 2.5 Austria 0.5 1.3 2.0 2.0 EU 3.2 6.5 6.5 6.5 TheNetherlands 9.8 4.6 4.6 1.3 Portugal 2.0 2.0 2.6 2.6 Spain 4.4 4.8 4.8 4.8 World Bank 10 10 10 10 86. The Bank's coordination with donor partners extends beyond the BSG, however overall , donor coordination could be strengthened further. For example, the Bank and the MCC provide complementary support under the National Road Sector Program. IDA support for privatization is linked to infrastructure investments, e.g. the rehabilitation o f the port o f Praia, supported by the M C C and Portugal, and the Bank supervises the Dutch cooperation's budget support for education. While it is more difficult for IDA to play the platform role it often plays in other countries inthe absence o f a local office presence, the Bank does play a key role in such areas as public finance, roads and energy in ensuring strategic coherence o f donor support through its role in the policy dialogue and technical support. There is nonetheless still considerable scope for strengthening donor coordination under the Government's leadership (see Table 6 and the matrix inAppendix 6 on priority areas o f interventionfor donor partners). Table 6. DevelopmentPartnersand CurrentAreas of Intervention Partner YOof aid Sectors supported World Bank 17,9 Basic infrastructure;private sector development; energy and water; public financial management; public finance. Portugal 13,5 Humancapital developmentand capacitybuilding; territorial development andrecovery; socialprotection services; physical security. EuropeanUnion 12,l Infrastructure linkedto the health sector; water and sanitation ; The Netherlands 10,o Environment; public finance reform; vocational training. Luxembourg 938 Health; educationandtraining; roads; water and sanitation UNSystem 7,6 Goodgovernance; water and sanitation; population; decentralization; education; health; ruraldevelopment;childprotection AfDB 595 Infrastructure; education;rural development;poverty reduction; energy Japan 554 Fisheriesinfrastructure;undergroundwater sources USA 4 2 MCA 2005-2011: transport infrastructure;rural development ;private sector development Germany Natural resources; educationandtraining Spain Decentralization; culture and heritage;public finance BADEA Infrastructure; education;rural development;socialprotection; private sector development France Good governance; decentralization; water and sanitation Austria Decentralization;water and sanitation; rural development;public finance (as of 2007) China 0,9 Infrastructure construction Source: How to Manage the Transition Together: Report for the Group of Support for the Transition; Department of Planning, Ministry ofFinanceand Public Administration, 2006 31 VI. COUNTRYMONITORINGAND EVALUATINGAND RISKMANAGEMENT 6.1. MONITORING AND EVALUATING THEBANK'SPORTFOLIO 87. The Bank has had a good quality portfolioof operationsin Cape Verde. Four out ofthe five projects that exited duringFY05-08hadsatisfactory outcomes, and all three operations inthe portfolioas of February 1, 2009, (totaling US$48.5 million) are ratedsatisfactory, with no flags for problem^.^' The last independent procurement review rated the three projects currently in the portfolio as moderately satisfactory on procurement. To improve portfolio management, the Bank intends to conduct procurementclinics so as to strengthen capacity withinthe country. Financialmanagementratings for the operationsare also ratedabovethe lineandconsideredgenerally satisfactory. 6.2. MONITORINGEVALUATINGRESULTS AND 88. The Government is designing an integrated approach for monitoring and evaluating the GPRSP-II?' The approach, which is still under development, includes: (a) integratingthe budget and financialmanagementsystem with the technical aspects of programs and service delivery; (b) developing a unifiedtechnologicalplatformthrough Cabo Verde Digital; (c) providingopen access to the main data warehouses on nationalstatistics, policies and projects; (d) refiningthe indicators, and (e) strengthening statistics and planning sector units within Ministries. The design is advancing, although capacity weaknesses, low levels of communication among stakeholders, and the need for financial resourceshave to be addressedto ensurethat the M&E system i s fully operational. 89. The implementation of the Statistical Agenda is advancing slowly, but a shortage of resources means that data are incomplete on key areas of Bank support and the INE is underfunded for the 2010 census. INE is the mainproviderof data on employment, drawingonregular employment and household surveys. INE is also the main source of data on tourism and is currently preparing a survey on tourists' satisfaction with their visits. Statistics on infrastructureare incomplete and are not highlighted in the StatisticalAgenda, representing a challenge for the Bank. INE is also preparingthe Populationand HousingCensus for 2010 with insufficientfundingfor this critical activity: the census is the foundation for all future surveys and for sector indicators, such as on education and health. Other key activities include implementing the second in-depth household budget and consumption survey (knownas IDRF-2)to updatethe mainpovertyindicators. 90. The Bankand donorswill monitorthe implementation of the CPS throughjoint missionsas well as through separate project supervision missions. The Results Framework will be usedto track intermediateindicators andmeasureprogresstoward higher leveloutcomes (see Appendix 1). The Bank's ImplementationSupervisionReports are an important element in monitoring and evaluatingprogress on the CPS as well. Annual Country Portfolio Performance Reviews will provide a forum for aggregating indicators andraisingissues on resultsandoutcomeswith the Authorities. 6.3. MAINRISKS AND MITIGATINGMEASURES ' 91. There are importantrisksto achievingthe anticipatedresults underthe CPS. They include: 49 The operations are: a FY03 Growth and CompetitivenessProject (US$14Sm); an FY02 HIV/AIDS Project with additional financing(US$14m), andan FY05 RoadSector SupportProjectwith additionalfinancing(US%20m). The National Poverty Committee is the GPRSP Steering Committee that oversees the process. A Technical Secretariat for DevelopmentAssistance(STAD) under the GeneralDirection of Planninghas day-to-day responsibilitiesfor providingtechnical guidance,monitoringperformance, and informinginternalandexternalpartnersof progress. 32 92. A deepening and extension of the global economic downturn, or a subsequent return to higher food and fuel prices. The recent shocks and globaleconomic slowdownpose a significantrisk to economic growth and poverty reduction for CapeVerde. For example, growth estimates for CapeVerde for 2009 have virtually been halvedover the past two months. Giventhe importance of tourismreceipts, FDI and remittances flows for Cape Verde's economic growth, the Authorities will need to further develop their policy options to respond to the risk of contagion from the global financial slowdown. Factors that mitigate the risks related to the global crisis include Cape Verde's build-up of sizable international reserves in recent years; its standing line of credit with the Central Bank of Portugal; its continued monitoringunder the IMF PSI, its access to budget support from the Budget Support Group of donors, includingthe Bank, and the country's solidtrack record of proactive economic management and timely adjustmentto shocks. The Bank's focus onthe energy sector is also intendedto addressone of the major sources of risk relatedto contingent liabilities,while post-FSAP supportwill serve to address risks of contagionto the financialsector. Neverthelessthe risk remains substantial, andthe Bank is engaged in enhanced surveillance of key economic indicators-together with the IMF-in light of the risks of contagion. In addition, the upcomingPoverty Assessment will simulate the poverty impact of the shock across different groups so as to identify further mitigation measures.While a repeat of the sharp rise in food and fuel prices that occurred in 2008 is less likely in a deflationarycontext, it would pose a risk to Cape Verde as a net importerof food and fuel if it were to reoccur. Cape Verde was able to address the shock fairly well in 2008 through its grain stocks, tax and safety net policies and other fiscally prudent measures. However an extended food or fuel price pressure could strain the fiscal situation and delay further poverty reduction, especially in rural areas. In light of these risks, the Bank intends to prepare a CPS Progress Report earlier than would normallybe scheduled so as to be able to review and adjust its programas needed, especially ifunpredictable negativedevelopmentsemerge. 93, Political climate and implementation of reforms. The Government's commitment to implementingstructuralreforms, particularlyin infrastructure,is critical to achieving the CPS outcomes. With the next Presidential and legislative elections slated for early in 2011 and with a more polarized political scene since the opposition MpD won a narrow majority of municipalities in the May 2008 municipalelections, it is likely that the windows of opportunity for more difficult institutionalreforms, e.g. in relationto Electra, are either in 2009 or else inthe secondhalf of 2011and in2012. CapeVerde's two leading parties, the governing PAICV and the MpD, have established a 14-member cross-party commission to build political consensus around those reforms that require a two-thirds majority in the NationalAssembly to become law, such as constitutional amendments, and this commission could also prove to be instrumental in seeking consensus on implementing key policy reforms and responding promptlyto difficulties emerging from the globalcrisis. Howeverthe politicalscene could leadto delays in such key initiatives. The Bank has therefore set realistic outcome indicatorsin the Results Framework that take the politicalcalendar and context intoconsideration. 94. Contingent liabilities. There are risksof contingent liabilities from a number of areas, including from public or semi-public companies not operating efficiently or being affected by the economic downturn. Inadditionto the above mitigatingmeasuresfor exogenous shocks, the CPS provides support to address these issues head on, including supporting Electra's recovery and recapitalization, strengtheningARE and helpingto identifysustainable PPPs, so as to reducethese risksto more moderate levels. 95. Weak capacity. Weak administrative capacity, the limited number of technical staff and high turnover of senior staff in core ministries could pose a risk to the implementation of the GPRSP-I1and reforms supported by the CPS. To address this risk in the short term, the Budget Support partners are financing a combinationof capacity-buildingactivitiesand technicalsupport. Joint supervision missions 33 and close coordinationwith the Authorities have helped to ensure an adequate use of funds. In the medium term, the ongoing civil service reform program should moderate the risk by helpingto build a better trained andmore stable cadre of staffunder an appropriate pay structure.The GrowthTA and SME Support operation and an IDF to strengthen M&E capacity will complement ongoing actions to strengthen publicsector capacity. 96. Decline in external concessional support. With Cape Verde's graduation to MIC status in January 2008, donors may beginwithdrawingconcessional aid at a faster pacethan foreseen which could result in reforms slowing down, domestic spending increasingor commercial borrowing rising, both of the latter increasing risk of fiscal slippages. The Government has mitigatedthis risk by including only firm agreements rather than notional commitments on support in its current budget and medium-term framework. Through dialogue with development partners and the BSG, the Bank will seek to moderate this risk further by supporting Cape Verde's continuedaccess to concessional financing and encouraging othersto do the same. VIII. CONCLUDINGREMARKS 97. Cape Verde has reached an important juncture in its development and the Bank's partnership can make a clear difference. Since October 2007, Cape Verde has graduated to MIC status, entered a Special Partnership with the EU and joined the WTO. It has established a path of peaceful political transitions and prudent economic management and an open economy that have contributed to sustained high growth rates through 2008, with a major impact in terms of poverty reduction. Cape Verde has also established a vision for its development, which is one of economic transformation, grounded in its unique geo-strategic, natural and cultural assets, and has embodiedthat vision in its GPRSP. However, as a small archipelago in the Sahel zone with limitedmineralresources and an economy that is highly dependent on FDI, remittance flows and tourism receipts, Cape Verde is vulnerable not only to the severe droughtsthat have left their mark on its history, but also to the food and fuel shocks that emergedlast year and to the current global economic downturn. Moreover, it still faces an important agenda of structural reforms in key sectors such as energy, transportation and public administrationthat call for strong leadership. It has also madevery clear that the economic growthmust be socially inclusiveand characterizedby solidaritywith the country'smostvulnerable population. There are importantrisks at this time, even after measures are taken to mitigatethem, however there are major benefits associatedwith Bank partnership with Cape Verde as the country endeavors to advance on its economic transformation agenda and weather the volatile global economic context. Successful implementation of the Bank-supported program, in partnership with other donors, can play a transformative role in key areas such as energy, roads, the business environment and public administration, while promotingsocial inclusionandorientingresourcesto protect andassist the poor. 34 vl m e . . e e U 5 .M ep U 3 C i M h I! b s 1 m a a cw 0 a a 00 m I I * * ' . . . ...... .............................. 8 ................................................................ 0 " ...................................................................................................................................................... . . . ................. ........................................................... 2 0 c) B 3 3 e U E z m 6Y CA 8 .............. I a iz 0 Ue I z3 Yv) k 0 *l 2 Appendix 2 REPUBLIC OF CAPE VERDE . 2005 CAS COMPLETION REPORT Country:Cape Verde Dateof CAS: January 27,2005 Periodcovered by the CAS CompletionReport:July 1,2004 -December 31,2008 CAS CompletionReportcompletedby: Joelle Dehasse, Sr. Operations Officer Date: March 11,2009 INTRODUCTION 1. This document discusses the results of The World Bank's Country Assistance Strategy (CAS) for Cape Verde datedJanuary 27,2005 and covering FY05-08. The report is based on discussions with Bank staff and Cape Verde officials involved in or familiar with Bank-financed projects, a review of various reports and project documents (aide-mbmoires, Implementation Status Reports (ISR), Implementation Completion Reports (ICR), Country Policy and InstitutionalAssessments (CPIA) and field visits. 2. Cape Verde is an archipelago of ten islands located off the west coast of Africa with a population estimated at 500,000, with almost twice that number living abroad, mostly in Europe and the United States, and accounting for significant remittance flows to the country (11 percent of GDP in 2006 and 9.2 percent in 2007). Despite its small size and geographic challenges, Cape Verde has one of the most successful economies in Sub-SaharanAfrica. Following a decade of robust growth, the country graduated from the UN list of Least Developed Countries (LDCs) to a low Middle Income Country (MIC) as of January 2008.' The country boasts a track record of more than ten years o f multi-party democracy, peaceful political transitions and effective participation of civil society in the governance process and macroeconomic stability. 3. The country's per capita income (GNI, Atlas method) is estimated at US$2,250 in2007, bolstered by a fast growing services sector (mainly tourism, telecommunications and construction), good governance and successful public programs that have increased access to education and healthcare, pavingthe way for the country to meet all the MillenniumDevelopment Goals (MDGs). Cape Verde has made significant gains in reducing poverty, which dropped from 49 percent in 1998 to 37 percent in 2002 to 27 percent in 2007. 4. Despite these gains, as with many island nations, Cape Verde is highly vulnerable to economic shocks not only due to its small size, but also to its location and geographic condition. Scarce natural resources and non-renewable energy sources, and the Sahelian climate, limit the country's opportunities for expansioddiversification of the production base and exports. Difficult agricultural conditions and the almost inexistent manufacturing sector have beena major cause of emigration and poverty. IIn2000, the UNconcludedthat Cape Verde would graduate from the Least DevelopedCountry category in January 2008 based on satisfyingtwo of three criteria:the country's income per capita and the Human Assets Index (level of human development). However, on the third criterion, EconomicVulnerability Index(EVI), CapeVerde rankspoorly. 5. Notwithstanding these vulnerabilities, macroeconomic policy helped to mitigate the effects of high food and fuel prices in early 2008, and the 2008/09 global financial crisis and recession were contained. A. CAPE VERDE'S LONG-TERMSTRATEGICGOALS 6. The Government's long-termstrategic goals supportedby the Bank's 2005 CAS were articulated in the Growthand Poverty Reduction Strategy Paper (GPRSP) prepared in 2004. The GPRSPwas based on earlier development strategies, notably Cape Verde's NationalDevelopment Plan (the Plan) and the GrandOptions ofthe Plan2002-2005. These goalswere expressedas follows:"to raise CapeVerdeans to a level of income and quality of life that values their human dignity by means of economic policiesthat guarantee sustained development, in a way that is compatible from a social, regional and inter- generational standpoint, environmentallysustainable, and basedon a growth standardbuilt on increasing productivity gains; overall, a development which minimizespoverty and social exclusion and that may bring about equity and socialjustice."* The Government put the focus of the GPRSP on accelerating growth through reforms to make the country more competitive and to promote investments in infrastructure to attract privateinvestments. Meanwhile, the Governmentalso sought to find responsesto stubborn poverty and growing inequity for those not benefitingfrom growth, particularly those living in rural areas or not having skills for the services industry. The strategy focused on five key pillars for public intervention:(i) promotinggood governance; (ii) improvingcompetitiveness and privatesector-led growth; (iii)fostering human capital development; (iv) strengthening social security and solidarity; and (v) improvinginfrastructureand landusemanagement. 7. As stated in the GPRSP, the first pillar, good governance focuses on four objectives: (i) reform of public administration, (ii)strengthening of the judicial system, (iii)reform of the State's financial management system, and(iv) decentralization. 8. The second pillar, improving competitiveness and private sector-led growth, includes a number of objectives and policy priorities, notably: improving labor policies, strengthening the labor market, and creatingjobs; strengtheningthe role of the State inthe processof privatizations,inparticular with regard to economic regulation and legislation; developing adequate financing mechanisms for a small economy (notably micro-credit); strengthening the rural public works program (FAIMO) to continue providing emergency job opportunities, particularly in rural areas; pursuing the sustainable growth of agriculture; ensuring food security; strengthening policies regarding the fisheries sector; and implementinga strategic planfor tourism. 9. The third pillar, developing human capital, includes the objectives of improvingthe education systemandprofessionaltraining; strengthening health systemsand improvingaccess of the poor to health services; and increasingbudget allocations to the healthand educationsectors. 10. The fourthpillar, developing infrastructure,promotingland use planningand protectingthe environment, includes putting in place more effective and sustainable transport systems within and between islands, covering air transport, land transport and maritime transport; strengthening basic infrastructureservices, including energy, water and sanitation; and implementingthe Second National Action Planfor the Environment T I (known as PANA 11). *Growth and Poverty Reduction Strategy; Ministry of Finance and Public Administration, Republic of Cape Verde, September 2004. 41 11. The fifth pillar, improvingthe effectivenessand sustainability of the social protectionsystem, seeks improvements in the social security regimes in both the private and public sectors; reforms to ensure the financialviability of the public sector's pensionprogram(to whichworkers do not contribute); supportfor workers that are injuredonthejob or fall ill;andsocial security for independentworkers. 12. The Governmentcompletedthe preparationof its secondGrowthand PovertyReduction Strategy (GPRSP-11) in May 2008. The GPRSP-I1 largely retains the same long-term strategic objectives as previously, though with greater emphasis on investing in infrastructure, including through private partnerships andhumancapitalto helptake advantage of new opportunitiesandtransform the economy. B. CAS OUTCOMES I.CASObjectives 13. The Bank's 2005 CAS to support Cape Verde's GPRSP was discussedat the Boardon February 22, 2005. The CAS benefited from close consultations with Government, development partners, civil society and local communities during the preparation of the GPRSP. The CAS identified two key challenges for Cape Verde: (i)growing demands on public funds for provision of non-primary social services andsocial safety netsfor the poorest; and(ii)buildinga competitiveeconomy. Lendingandnon- lendingsupport was plannedaround three pillars: (1) ensuring sound macroeconomicstability and sound public finance and budget systems; (2) enhancing the investment climate and increasingcompetitiveness through public-privatepartnerships (PPPs); and (3) implementingsocial programs to alleviate poverty and inequity. 14. Duringthe CAS period, IDA providednew commitments ofUS$63 million (US$33 million from IDA 143). The CAS had projected a four-year base case lending program of US$50 million and a proposedGEF grant of US$5 million. A high-case scenario estimated lendingofUS$71million; however this level of lendingexceededthe IDA resources available to the country, even with its strong portfolio and CPIA performance. Giventhe limited IDA financingenvelope (averaging US$12.5 million a year), the CAS proposed to shift from providing mainly investment lending to providing a greater share of financing as programmatic lending, or budget support, to be underpinned by annual public expenditure reviews. This was successfully implemented and created strong synergies and harmonization of Government and budget support donors' priorities. The Bank also moved forward with most of the plannedlendingoperationsinthe CAS, with a multi-sectorinfrastructureoperationdroppedandPRSCIV postponedto FY09due to insufficientIDA resources. The Bank also didnot completeanalyticalwork on the rural and social sectors, reflecting the shifting priorities during CAS implementation. The Bank's CAS also projected to influence results in areas where the Bank did not provide direct support (rural development, environment). The CAS performanceoverallis Satisfactory andbenefitedfrom a relatively good global environment for Cape Verde during most of the period of the CAS and strong Government leadership. 11.Progresstoward CASObjectives Pillar 1. Ensuremacroeconomicstabilityand sound public finance and budget systems 15. This CAS pillar is aligned with the first two GPRSP pillars of promotinggood governance and improving competitiveness and private sector-led growth. Under this pillar, the Bank proposed to contribute to macroeconomicstability,modernizinggovernment and strengtheningpublicfinance through This includesan additional allocation of $2.6 million equivalentof IDA resources inFY08. 42 analytical work---including economic monitoring, Public Expenditure Reviews, review of fiduciary systems, and an investment climate assessment--andprogrammaticand investment lending. 16. The CAS proposed a series of Poverty Reduction Support Credits (PRSCs, programmatic loans) as the main lending vehicle to support improved budgeting and budget systems, focusing on public expenditure management, civil service reform, decentralization, and judicial reform. The Growth and Competitiveness Project supports the Government's efforts to simplify procedures and enhance the investmentclimate. 17. Four PRSCs were implemented from 2005 - 2008, through which the Bank played a key role in bringingtogether a Budget Support Group of donors to jointly finance GPRSP policy reforms. In April 2005, the Budget Support Group was launched with the first of several "Partnership Frameworks" between donors (European Commission, the Netherlands and World Bank) and Government. By 2007, the Budget Support partners also includedAustria, Spainandthe AfricanDevelopmentBank. At the time that the CAS was approved, the Government had also entered into a three-year Poverty Reduction and Growth Facility (PRGF) arrangement with the IMF for SDR 8.64 million, approved by the Executive Boardon April 10,2002. In September2006, the Governmententeredinto an agreementwith the IMF on a medium-term economic program to be supported by a three-year non-disbursing Policy Support Instrument (PSI). Through the PRSCs, the Bank played a key role in mobilizing a coordinated donor approachto budgetsupportandwas ableto support a broadrange ofreforms envisaged inthe GPRSP. 18. The key CAS outcomes, as stated inthe .CASresults framework, and the progress made toward those outcomeswith Bank support, are listedbelow: 19. CAS outcome: Ensure macro stability and maintain debt sustainability: This outcome was to be achieved by maintainingan average per capita GDP growth of at least 2 percent and keepingthe fiscal deficit low. This outcome was surpassed and performance was highly satisfactory. Cape Verde continuedto pursue sound macroeconomic policies duringthe CAS period, enablingthe country to make up for slippages at the beginningof the decade. Real GDP for the period 2005-2008 is estimated to average 7.5 percent, peaking at 10.8 percent in 2006 (growth in 2008 is estimated at 6.0 reflectingthe worldwide slowdown). Real growth per capita has increased on average by over 5 percent, faster than most small islands and the average for Sub-SaharanAfrica. The Governmentconsolidated fiscal reforms and kept deficits low; however, it still grappled with a tight budget with little fiscal space and faced contingent liabilities dueto difficultiesinthe energy sector.A debt sustainabilityanalysis (DSA) prepared by the IMF and World Bank in June 2005 concluded that Cape Verde's external debt levels appeared sustainable but would require a prudent approach to borrowing, consolidating fiscal reforms and strengthening debt management. A DSA carried out in December 2007 validated these conclusions. Under the 3-year IMF Policy Support Instrument, concurrent with the CAS period, a ceiling on annual borrowing and guarantees (in non-concessional terms) was agreed upon to ensure public debt sustainability. 20. CAS outcome: Public expendituremanagement more transparent and oversight institutions empowered. Although the CAS did not propose specific indicators, this outcome was achieved and performance is satisfactory. Public expenditure managementhasbecome more transparent as a result of a numberofreforms supportedby the Bank: 43 Tax management: A new taxpayer registry and tax identification number, supported by a modern informationtechnology (IT) system, were successfully put in placeO4Governmentpursuedtariff reforms initiatedin2004, includingthe introductionofthe VAT. 0 Budget execution: The 2006 budget law included measures to strengthen fiscal transparency, including by reflectingpetroleum subsidies and providing for the clearance of 35 percent of arrears. In April 2006, oil subsidies were eliminated. An "Integrated Financial Management and Information System (IFMIS)" is now connecting all Governmentministries,allowingthem to monitortheir accounts inrealtime-a key achievementfor the Government. 0 Empowering oversight institutions: Two laws were prepared (an Organic Law of the Inspector General of Finances(IGF) approved in 2005 and an Organic Law of the Court of Auditors (approvedby the Council of Ministers and submitted to Parliament in 2007). The Independent General Audit Office (TdC) recruitedconsultants to enhance its capacity and a law to strengthen the TdC was prepared and approvedby the Parliament in October 2007. 0 E-government is one of Cape Verde's most successful public sector reforminitiatives of the past few years and has significantly increased transparency and efficiency. Through NOSI (the Operational Nucleus for InformationSystem, or Cabo VerdeDigital as it is commonly known), Governmenthas not only put inplace the IFMIS, but also integratedthe Government's humanresources databaseand payroll systems; installedfinancialmanagement systems in the largest municipalitiesto boost revenues; helped revamp the tax registry and reengineered various administrative processes to make select services available electronicallythrough a "one-stop-shop" approach. The Bank has supportedNOSIthrough the PRSCsas well as the GrowthandCompetitivenessProject. 21. CAS outcome: Ensure that public expenditures are allocated and spent according to GPRSP priorities. This outcome was to be measured by the share of budget allocated to key social sectors (health, education), as well as enhanced protection extended to vulnerable groups through increasedshare of programsbenefittingthem and introductionof cost recovery in social sectors basedon abilityto pay (see also CAS outcomes under Pillar 3 in Table A2-1). This outcome was achievedand is satisfactory. Government met its GPRSP budget allocations for health and education for 2005 through 2008, even exceeding these in some instances (see Table A2-1). However, it should be noted that these achievements were made despite the fact that annual budget laws were not adequately aligned with the GPRSP or the MediumTerm Expenditure Framework (MTEF). This was in part becausethe preparation of the GPRSP and of the MTEF for 2004-07 was initiatedat the same time, and, as a result, the GPRSP was not based on the MTEF. Cape Verde's MTEF provides projections for recurrent and investment budgets by a classification that does not match the administrative classification of the budget nor the public investment programs. For example, MTEF projections for education and health deviated from GPRSP goals by 40 percent and 100 percent, re~pectively.~International TA was provided across ministriesto develop a globalMTEFand sectoralMTEFduringthe CAS period. 22. CAS outcome: Municipalities function in clarified framework matched by adapted resources. This outcome was partially satisfactory. As discussed in the 2008 PER, there is still no clear framework that delineates the roles and responsibilities of the local and the central governments. However, a local finances law passed by Parliament in 2005 was successful in increasing central Government transfers to municipalitiesfrom 7 to 10 percent. For some municipalities,particularly the smallest ones, central Government transfers represent up to 50 percent of their income. To strengthen their financial management and communication, NOSI installed a Municipal Information System in twelve municipalities. The PRSCs supportedthe decentralization agendato help Government clarify the responsibilitiesof municipalitiesand funding issues, but without significant progress. Discussions on a The Tax Directorate(known as DGCI) has concluded the fiscal identificationbut it now waiting for the implementationby the NOSI of the fiscal identificationcards. 'EnhancingPlanningto Increase Efficiency of Public Spending, Public ExpenditureReview, World Bank, June 2008. 44 draft decentralization law were ongoing for several years without resolution due to the absence of consensus.The decentralization law was droppedas anactionto be completedunderthe PRSC series. 23. CAS outcome: Improved ability to manage public sector reform across institutions. No indicatorwas proposedbut this outcome was partially achieved and performance is partially satisfactory. The Governmentestablishedthe Ministryfor the Chairmanshipofthe CouncilofMinisters, StateReform and Defense, with a specific mandate of strengthening public sector reform across Government institutions. The Unit for the Coordinationof Reforms (UCRE) was created under this ministry, with representativesfrom all sector ministries,to prepare an overall framework for coordinatingreformefforts across institutions. NOSI's work has also helpedimprove coordinationby integratingadministrative and financialtools, suchas with the IFMISand integratedhumanresourcesdatabaseandpayroll. 24. One of the key risk concerns ofthe CAS was the issue of contingent liabilities, particularlyfrom loss-makingenterprises. Inadditionto supportingPPPs in an effortto reducethe burdenon the State, the Bank supportedGovernmenteffortsto bettertrack autonomous institutionsandthe potentialfor liabilities to arise. The Ministry of Finance created a unit charged with tracking State participationin companies. Autonomous institutesand ministrieswere all linkedthrough the integratedonline financialmanagement system (SIGOF), enabling the Budget and Treasury units to better follow budget execution and take measuresto prevent liabilities from being passedon to the central Government. The authorities are also compiling the consolidated balance sheet of five state-owned enterprises (ASA, TACV, ENAPOR, Electra and IFH) and detailing their debt by maturity, currency, residency, and state guarantees, which will be submittedto the CouncilofMinistersby March2009. 25. CAS outcome: Framework to manage and train civil servants to be better adapted to modern administration. This outcome was to be measuredby the number of public sector managers in place and the number of civil servants trained. However, this indicatordoes not seem consistent with the more modest outcome of establishing a framework, which was achieved. Performance is considered moderately satisfactory. The establishment of the human resources database and its integration with payroll is considered a major achievement toward civil service reform. The Government is deconcentrating access to the database, currently only available at the central level, to five ministries. The Career and Salary System is beingrevisedand a report has beenpreparedproposingoptions for how to better managehumanresources. A draft Basic Law on Civil Service was approvedby the Councilof MinistersinJanuary 2008 followingconsultationswith labor organizations. Justice sector 26. As part ofefforts to modernizegovernmentunderthis pillar,the Bank also sought to help address weaknesses in the justice system, a key element of the GPRSP Pillar 1 to strengthen governance and Pillar 5 to strengthen social protection. The Bank's support inthis area was largelyimplementedthrough two grants, a US$364,702 IDF grant to strengthen the rule of law which became effective in December 2003, and a US$954,460 JSDF grant to support access to legal services for vulnerable groups including women, approved in mid-2004. The PRSCs, the Growth and Competitiveness project and the first GPRSP Trust Fund (prior to the CAS) also supported initiatives in this sector. CAS outcomes, and progresstoward those outcomes, were mixed, andare listedbelow: 27. CAS outcome: Improved adherence to and knowledge of the law in law communities. This outcomewas achievedandperformance is satisfactory. There were a number of activitiesundertakenwith Bank support to strengthen knowledge of the law, including: training and a study tour for 12 Cape Verdeanjudges which instilledgreater support for socialjustice initiativesand ledto working groups that set out to create small claims courts. Twenty-three mediators were trained and accredited on how to 45 apply a mediationlaw approved in 2004, allowing small conflictsto be mediatedrather than languish in the officialjustice system. The trainingalso gave mediatorsthe skills neededto runthe Casus de Direito (legal centers) set upto providelegal servicesto the poor; however, these legalcenterswere slow inbeing establishedand operational. The Ministryof Justice compiled all Supreme Courtdecisions dating back to 1994 on a CD-ROMfor distributionto the legalcommunity. The Institutefor Women's Condition(IWC) receivedtrainingon advocacy for women's legal protectionandrights, and organizeda series oftraining- of-trainersevents for NGOsthat advocate for women. The IWC alsotrainedjudges on gender sensitivity. However, a legal education program that was created specifically to provide sustainable training for aspiringlegal professionals, and which would have made an importantcontributionto this outcome, was never launched.(Seealsoparagraph 42 on new arbitration law). 28. The digitalizationprocessand the database of the Official Gazette are complete. The Imprensa Nacional (NationalPrinting, INCV) started on August 24, 2006 in an experimental phase, publishingon the Web the Official Gazette (www.incv.qov.cv). Today it is possibleto access all numberspublished in 2006 andto searchthe database. This meansthat users have access to all legislationpublished.INCV, in collaborationwith NOSI, developed a projectthat will expand the aforementioned possibilitiesto cover all the published legislationsince Independence (1975). This activity was supported by the Growthand Competitiveness Project. 29. CAS outcome: Increased free access to justice system by the poor. This outcome was to be measuredby the number of poor women benefitingfromjustice services; however, this indicator could not be measured in part due to the significant delays with activities supporting this objective. Nonetheless, the outcome was achieved and performance is moderately satisfactory. The Casus de Direito, legal centers for the poor with a particular focus on helping women, were a key instrument proposed by the Bank to support this outcome, supported with JSDF financing, but activities were significantlydelayedinitially. However, significant progresswas made in 2007 and2008 All agreements betweenmunicipalitiesandthe 11 proposedlegal centers were eventually signed inthe first halfof 2008, and 7 of the legal centers were operational by the second half of 2008. Six of the centers have been providingfree legal adviceto targeted communities in 3 islands, 6 outreach paralegals havebeentrained, and 28 community leaders have beentrained in basic legal knowledge of domestic violence, family and labor law. There havebeensome 40 trainingsessions for local villages and communitiesin legalliteracy and 10,000 leafletswith informationon the legal centers and their services have been distributed. With Bank support, the Ministryof Justice, workingwith NOSI, createda database to monitor access tojustice for the poor in CapeVerde. 30. CAS outcome: Improved supply of professional mechanisms such as mediators. This outcome was to be measuredby the number of mediators trained and number of disputes resolved. The outcome was achievedand performance is satisfactory. As discussed previously,the Bank supportedthe training of mediators (see paragraph27). Other importantresults were the promulgationof a decree-law on mediation and a law on arbitration. These laws established new alternative dispute resolution mechanisms (ADR) for legal claims of privatecitizens and businessentities in Cape Verde and helpedto reducethe burdenonthe country's courts. The numberof disputes resolvedhas not beentracked. Pillar 2: Support private sector-led growth through enhanced investment climate and increased competitivenessthrough public-privatepartnershipsininfrastructure 31. This pillar is aligned primarilywith the GPRSPpillars I1and IV whose objectives are to promote competitivenessandprivatesector-ledgrowth, humancapitaland infrastructure services. 46 32. In the context of steadily growing fiscal pressures from various sectors, and faced with the prospect o f shrinking concessional aid and remittances, Cape Verde's Government sought to increase investments from the private sector particularly in infrastructure services, so as to focus expenditures on health, education and social protection programs. While Cape Verde greatly benefited from the economic liberalizationand divestitures o f the 1990s, implementation in some areas had been slower than expected, for example inthe area o f economic regulation. 33. The key CAS outcomes, as stated in the CAS results framework, and the progress made toward those outcomes with Bank support, are listedbelow: 34. CAS outcome: Complete the divestiture program by 2005. This outcome was to be considered achieved if the privatization o f TACV, ENAPOR and EMPROFAC were completed. These outcomes were not achieved and performance is not satisfactory. The Government's divestiture program initiated in the early 1990s stagnated in the early 2000s. Private participation was introduced in all key infrastructure sectors, with some exceptions in transport. Under the CAS, the Bank planned for the Growth and Competitiveness project to finance outstanding divestiture efforts that had been initiated under the Privatizationand Regulatory Capacity BuildingProject, which closed in2004. 35. A management contract for TACV was initiated on December 5, 2006 and its achievements (increased efficiency and savings, new commercial agreements, control o f overhead costs and sale o f non- core assets) are expected to help attract investors' interest inthe privatization o f the airline. However, the airline has not been privatized. 36. ENAPOR was also not privatized. In2006, the consulting firm o f Booz Allen Hamilton was hired to provide assistance with the process, but did not complete this work. A new privatization advisor was recruited inMarch 2007. 37. The privatization process o f EMPROFAC was preceded by efforts to establish a regulator. A food and pharmaceutical regulating agency (ARFA) was set up in October 2004 and the agency began operations in September 2005. As o f end 2008, AFRA was working on establishing a sustainable funding mechanism for itself (levy on sector operators), and on a framework model to launch the privatization o f EMPROFAC inthe first quarter o f 2009. 38. CAS outcome: Improvedinterface between public and private sectors. This outcome was to be measured by the completion o f an action plan to reduce administrative barriers. This outcome was achieved and performance is highly satisfactory. The Government's efforts to reduce administrative barriers and improve the investment climate have been boosted by the advances in information technology and communication, largely made possible by Cab0 VerdeDigital (NOSI). Casado Cidadiio (the house o f the citizen) is one o f the many projects Cabo Verde Digital has launched to improve the transparency and efficiency o f public services. The first Casado CidadGo events started to be available to the general public in December 2007. The first products available on-line are certificates (birth, marriage, death, etc.), o f which some 3,000 have been issued. Businesses and individuals are now able to pay their taxes on-line. The ability to register a business in one day was officially made available on March 14,2008. 39. The financial system has been rapidly modernized. Through'the combined efforts o f the Government, the Central Bank o f Cape Verde, the commercial banks and the Chambers of Commerce, substantial strengthening o f the financial system has occurred, available financial products have expanded and the financial market has significantly deepened. Electronic banking has been quite successful as demonstrated by the measurable increase in the volume o f transactions through Automatic Teller 47 Machines (ATM), available on all the islands, and Pointof Sale (POS). To date, 62 ATM and 475 Point of Sale (POS) machines serve morethan 88,000 issuedelectronic debit cards. The periodfrom December 2005-2006 saw an increase inthe value of ATM transactions by 29.3 percent and of POS transactionsby 72 percent. 40. CAS outcome: Transaction costs are reduced and contribute to improved supply chains. This outcome was to be consideredachieved ifat least three value-addedservices were introducedduring the CAS period. This outcome was achievedand performanceis satisfactory. With the improvementsin information technology used by the civil service, including customs and other departments, many transactioncosts have beenreduced, bothin financialand administrativeterms, contributingto improved supply chains. Electronic VISA was introduced in Cape Verde in December 2004 and significantly facilitatedthe development oftourism andthe increase of foreign exchangeflows into the country. As of June 30, 2007, (a) all of the islands have access to VISA throughthe ATM or Points of Sale; (b) there were more than 135,000 transactions in 2006 and within another six months, more than 250,000 transactionshadtaken place with transactionvalue totalingsome 25 million (US$32 million equivalent). All commercialbanks issuecredit cards. 41. CAS outcome: Property rights are strengthened and legal framework facilitates rapid and fair dispute resolution: No indicator was provided for measuring property rights and the Bank's involvement inthis area was minimal. That said, a key step toward strengthening propertyrights was the preparation of a draft Land Cadastre Law which was finalized in 2007 and sent to the Council of Ministersfor approval before being submitted to Parliament for enactment. In addition to an extensive program of topographical naming of mountains, valleys, rivers, bays, etc., a second program is focusing on modernizing registry offices. Beginning in early 2008, a new five-year project will support the establishmentof land registryoffices in at least 17 CapeVerde municipalities. Donor funding of at least US$2 millionwill be neededto assist with the hiringand training of staff and the acquisitionof relevant equipment. Theseactivitieswere indirectlysupportedbythe GrowthandCompetitiveness Project. 42. Another achievement is the enactmentof CapeVerde's ArbitrationLawwhichwent intoeffect in August 2005. Numerous arbitrationshave since taken place to resolve disputes. Since 2005, contracts betweenthe Governmentandprivate sector typically include a clause that requiresarbitrationinthe event of any dispute. 43. CAS Outcome: Adequately functioning EconomicRegulatoryAgency (ARE). This outcome was achieved and performance is moderately satisfactory because ARE suffered some delays and difficulties in fulfilling its mandate. In 2003, the Government established the Agdncia de Regulamentaqtio EconGmica (ARE) to regulate electricity, water, telecommunications, and urban and maritime passenger transport. ARE replaced a previous multi-sector regulatory agency (ARM) that had never becomefully operational. At the time of CAS preparation, ARE was just becomingfunctional,with staff being hired. ARE was staffed and had begun developing tariff and other regulations by late 2005. Since being established, responsibility for regulating the telecoms sector has been transferred to the National Agency for Communications (ANAC), an autonomous regulator.In the transport sector, ARE has developed all regulations required to tender collective urban transportation routes in Praia and Mindelo.ARE is responsible for setting and implementingtariffs for petroleum products, electricity and water but has not always effectively carried out this mandate. In April 2006, the Bank approved a $400,000 capacity-buildinggrant to buildcapacity at ARE, but the grant hadnot been implemented as of December 2007 and was extended in early 2008 as part of a stepped-up effort by the Bank to help Government resolve outstandingissues inthe sector. 48 44. CAS outcome: Comprehensivelabor code in place. This outcome was to be measuredby the creation of 2,000 formal sector jobs. This indicator was not tracked; however, a comprehensive labor code is inplace and this outcome has been achieved with a satisfactory performance. Labor policies had hampered the Government's divestiture from formerly state-owned enterprises and parastatals, with high severance pay regulations and limited portability of pension benefits. The Government prepared a new comprehensive labor code to facilitate labor mobility and ensure a clearer link between compensation and productivity. The Government undertook extensive consultations on the labor law, which Parliament gave Government the legislative authority to enact. As a result, it was published in October 2007 and subsequentlypassedinto law in April 2008. 45. CAS outcome: Increase in public-private partnership investments to enhance competitiveness and reduce costs. This outcome was to be measured by: (a) improvements in infrastructure competitiveness indices; (b) a 10 percent improvement in energy and water connections to customers; and (c) a reduction in cost of international telecom to US$0.75/minute. The results in energy, water and telecom were achieved; however, infrastructure competitiveness indices were not available to measure performance. 46. The overall performance of PPPs duringthe CAS period accounts for the moderately satisfactory performance, as there were some disappointments. At the time of CAS preparation, the Government had completed the divestiture of a number of key enterprises, including in the energy, water and telecommunications sectors. The Bank sought to help ensure adequate functioning and services delivery of these PPPs. 47. Electra was privatized in December 1999, with the sale of 51 percent of the share value of production assets of electricity and water to a Portuguesejoint-venture (the Strategic Partners). However, in July 2006, the Government regained the position of majority shareholder following protracted and unsuccessful negotiations on a series of issues concerning tariffs, Government arrears to Electra, and delayed investments on the part of the Strategic Partners. The CAS' main concern regarding Electrawas to improve efficiencies and services under the PPP, encouraging investments and new operators in distribution to promote competition. In addition to the PRSCs, the Bank-supported the sector through a US$17 million Energy and Water Sector Reform and Development project approved in 1999, and twice extended to close on June 2007. The Bank and other partners made efforts to support the dialogue between the Government and the Strategic Partners of Electra, but the PPP was dissolved due to an impasse resulting from a series of technical and financial operational issues that resulted in significant losses for Electra: high electricity and water losses; high operating cost due to high overheads; high commercial losses due to tariff setting below costs, weak billing collection, and illegal consumption; and weaknesses in the contractual arrangements (e.g., no basis for tariff setting and adjustments, and for profitability measurement), as well as lack of enforcement of the contractual provisions. The central Government cleared arrears to Electra in 2006, but municipalities and autonomous institutions still have arrears owed to the company. Electra continues to grapple with significant cash-flow problems and significant operating losses. In September 2007, it required US$6.3 million from Government to cover the tariff deficit regarding the periodMay 2006-February 2007. 48. As for the outcomes of the Energy and Water Sector Project, some targets were met under the first of the two Project Development Objectives: "Improved access to electricity, water and sanitation services, with optimum use of renewable resources, and promotion of private sector participation," including: increasing access to electricity from 69 percent to 90 percent in Praia, and from 92 percent to 98 percent in Mindelo; access to water improved from 25 percent to 45 percent in Praia, and from 50 percentto 60 percent inMindelo; and sanitation from 8 percent to 20 percent inPraia and 20 percentto 30 percent in Mindelo. However, the project did not successfully promote the use of renewable resources or 49 private sector participation, and it did not achieve its secondary development objective of increased operational and end-useefficiency inthe power and water sectors, nor did it reach the GEF objective of removingthe barriers to grid connected wind generation and off-grid PV electric systems despite this component havingbeendelinked from IDA and extendedto December 2008. This component supported a Wind Farm Project, which in 2006 had experienced procurement problems in a first tender and a non- responsivebiddingprocess in a second tender. Under the extension, the project sought to support a non- profit PPP fund, INFRACO, to attract investors. However, because INFRACO used EU procurement processes to launch the biddingprocess, the Bank was ultimately unable to participate. The GEF grant closed as Unsatisfactory in December 2008. Accordingto the final ISR, as of May 2008, penetrationof wind power was at 3 percentoftotal electricitysupply in 2002 andno householdshaveconnectionto off- grid solar PV systems. This compares to a target of 19 percent wind power penetration and 4,500 householdsconnected. 49. Telecommunications: This sector hasbeenone ofthe most successful inCapeVerde interms of increasingaccess, reducingcosts, improvingservices and strengtheningthe strategic, regulatoryand legal environment to allow competitionpost-privatization, In 2003, there was only one telecommunications company with a de-facto (even if not de-jure) monopoly on telecommunicationsservices until 2021; the sector legal framework dated from the mid-1990s; and there was no sector regulator. Cab0 Verde Telecom (CVT) was privatizedin 1996withPortugal Telecom Znternacional (PTI) winninga competitive biddingprocessand signing a 25-year concessionagreement. Startingin 2003, the Governmentlaunched wide-rangingpolicy and legal reforms aimed at fosteringcompetitionand strengthening the policy, legal and regulatory framework for information, communications and technology, and negotiating an agreement ending the exclusivity of CVT on the internationalgateway. By 2006, more than 15 distinct reforms had been undertaken, including:the adoption in 2005 of a new sector strategy to fully liberalize the telecom sector by January 2007; adoptionof a new sector law, the ElectronicCommunicationslaw, in November 2005; adoptionof a number of critical regulations; establishmentof ANAC, a new regulatory agency; awarding a secondGSM license to a US-basedcompany; and launching negotiations with CVT to agreeon compensationfor terminatingits exclusive rights over internationalcalls inJanuary 2007. 50. A numberof reforms supportedbythe GrowthandCompetitivenessprojectwere also pertinentto Government effortsto access the World Trade Organization (WTO), includinginthe area of supporting negotiations, customs reforms and intellectualpropertyrights.Although Cape Verde first applied to join WTO in 1999, negotiations started in 2004 and significantprogress was made duringthe periodcovered by the CAS. The EuropeanUnionandCapeVerde in 2007 concludedbilateralmarketaccess negotiations on Cape Verde's accessionto the WTO. InDecember 2007, the WTO General Councilclearedthe path for Cape Verde's membership in the WTO by approvinga package of agreements which spelled out the terms of Cape Verde's accession. In July 2008, Cape Verde became the 153`d member of the WTO. Within the framework of economic liberalization,a new customs Code was prepared, in line with the requirements onvaluationof imports andtrade facilitationofthe revisedKyotoconvention. 51. CAS outcome: Implementation of a comprehensive transport sector reform strategy and increased public-private partnerships in the sector. This outcome was to be measured by the introduction of an institutional and funding mechanism for the road maintenance fund and the introductionof privateparticipationin ports and airline services. This outcome was achieved inthe road sector and airline services, but not achieved in ports. Performance is moderately satisfactory. The Government sought to attract increased private investments in the transport sector, and the management contract for TACV was an important step toward private participationin the airline. The Government prepared a transport sector strategy in July 2007 which was finalized and submitted to the Bank in January 2008. A second generation Road Maintenance Fund (RMF) was established in June 2005 and became legally functional in January 2006. The RMF has been managing annual road maintenance budgets beginning in 2006, based on plans submitted by the Road Agency established in 2003. 50 Legislation was prepared and submitted to Parliament that would establish a Road Maintenance Levy for the RMF to directly collect the fuel levy at the pump. However, implementation o f the fuel levy was delayed due to political opposition and came into effect in early 2009. 52. Under this pillar, the CAS results framework proposed that Bank interventions would also influence the following outcomes: the development of smallholder production systems and non-farm activities including small-scale fishing, cottage industries and tourism, as well as the adequate implementationof the Environmental Action Plan prepared in 2004. The Bank interventions that would have influenced these outcomes, namely the Rural Development Assessment and fisheries project to be financed by GEF, were either never initiated or completed. As such, the Bank cannot be said to have contributed to significant progress in these areas, although the Bank did complete a fisheries sector strategy which proposed options for Government to devise alternative sources o f incomes for those employed in the sector given the over-exploitation o f fisheries resources. Instead o f preparing a Multi- sector Private Infrastructure Project that would support infrastructure associated with rural development and tourism, among other sectors, the Growth and Competitiveness project received additionalfinancing. Pillar 3. Implementsocial programsaimed at alleviatingpoverty and inequality 53. This pillar is aligned with the GPRSP Pillar I11 to develop human capital and Pillar IV to strengthen social protection. In discussing human development and social protection, the CAS pointed to the need for: (i)increased spending on social programs for the poor; (ii)increasing the quality o f education and expanding access; (iii)the need for a sustainable social protection system; and (iv) the efforts to mainstream gender issues. However, improvements in living conditions in Cape Verde contributed to the increased need for social spending. The 2004 PER showed that a key challenge for Government during the CAS period would be to maintain expenditures for human capital development as demand continued to rise in the social sectors, such as: rapidly increasing the rate o f expenditures on pharmaceuticals; increased demand for services as incomes improve and the population ages; and a growing deficit at the National Institute for Social Protection (the social security agency).6 Meanwhile, the PRSC ICR (May 2008) questioned whether the improvements in health, education and social services duringthe CAS periodhadthe intended impact on poverty. Education 54. Cape Verde has largely achieved the MDG o f assuring universal access to education, with a net enrollment rate in primary school o f 89 percent and secondary enrollment o f 60 percent in 2007. Primary completion rates are about 95 percent, literacy rates for adults were at 81 percent, and 97 percent for youth, in 2007. Analytical work prepared in 2003 and 2004 identified a number o f issues that needed to be addressed to strengthen services as well as the Government's ability to keep up with the sector's needs, including: too few children benefiting from early childhood education; a high repetition rate across the whole education system and a lack o f qualified primary education teachers; too few hours spent on classroom teaching lessons per day; lack o f vocational training and apprenticeship programs to meet the needs o f the labor market; and wage bill issues (across the entire civil service). Under the GPRSP, the Government's vision included measures to improve the quality o f primary education and increase access to pre-school and tertiary education. In addition, with the ambition o f building a competitive economy dominated by the services sector, the Government also sought to support professional training program, with technical and professional streams, to help ensure that those completing their secondary education and not pursingtertiary education get the skills needed to be competitive inthe labor market. The CAS proposed a Review o f Human Development to underpin support to the sector but this activity was dropped. 51 55. Under the CAS, the PRSC series (1-111)was the main Bank instrument to providesupport to the education sector. Policy priorities supported by the PRSC series included: (a) improve the quality and efficiency of education; (b) expand and diversify general and technical secondary education supply; expandandbetter orientprofessionaltrainingservicedelivery; and (c) restructure higher education. 56. The key CAS outcomes for education, as stated in the results framework are below. Progress toward these outcomeswith Banksupport is satisfactory: 57. CAS outcome: Early childhood education services expanded, to be measured by the percentageof 3-5 year olds enrolled in pre-primary. Serviceswere expandedto increaseenrollment of 3- 5 year olds from 57 percent in 2003 to 64 percent in 2007. The Government implemented a teacher training plan that increasedthe number of adequately trained teachers from 75 percent in 2003 to 83 in 2006, makingit possiblefor moreearly childhooddevelopmentcentersto operate. 58. CAS outcome: Improvedquality and efficiency of education, to bemeasuredby repetitionand completionrates andpercentageofprimaryteacherswith academic training(no baselineprovided): Inthe first year of the teacher training plan, 605 primary teachers were trained. The increase in qualified teachers is part of the strategy for improving the quality and efficiency of education by reducing the repetitionrate. The Government launcheda construction planfor 9 secondary schools and this helpedto expand access to secondary school to meet growing enrollment. Primary completionrates are about 95 percent. Nonetheless, primary repetitionremains high at all levels, at 14 percent for primary in 2007 - similarto rates in2004. 59. CAS outcome: Expanded and diversified general and technical education and professional training services, to be measured by the number of students completing 8 years of schooling and the percentage of poor students benefiting from school welfare programs (no baseline or benchmarks provided; see Table A2-1 for resultsmeasured). A vocational training assessmentwas completedin2005 along with a Strategic Action Plan. Technical and professional training became a key priority for the Government as it sought to upgradehumanresources skills and capitalto meet the needsof the booming services industries. A legal and regulatory framework for vocational training is being developed. The Bank's supportdidnotcontributeinany meaningfulway to this objectiveunderthe 2005 CAS. 60. CAS outcome: Consolidated and restructuredtertiary education sector, to be measured by enrollment in professional training and apprenticeship programs (this indicator was not tracked): With the establishmentof the University of Cape Verde in 2005 andthe Jean PiagetUniversityof Cape Verde in 2001, the country has a public and private university, respectively, which provide tertiary education. However, it is unclear that anything further has been done to restructure and consolidate the sector. Althougheducationwas droppedas a sector focus underthe 3`d PRSC (2007), the Bank agreed in 2007 to supervise activities financed by the Dutch in support of the implementationof Cape Verde's Strategic Plan on Technical andVocationalEducationand Training. This support, alongwith a proposedESW/TA to boost youth skills and employment, will be key instruments of support to the sector under the new CAS. Health 61. Cape Verde is on track to achieve the health MDGs. The infant mortalityrate was 25 per 1,000 births in 2007, and child mortalitywas 34 per 1,000 births. The maternal mortalityrate was 5 per 1,000 births. However, these good indicators mask significant disparities in services and an unsustainable healthfinancingframework.Amongthe mainsector issues are: 52 Inequity inhealth outcomes and access to health services 0 Human resources issues, including: insufficient medical personnel; poor distribution o f health staff within and among the islands; a growing number o f public sector doctors working in an unregulated private sector 0 Health financing issues, including: a weak system for allocatingthe health budget contributing to the inequities mentioned above; high and increasing spending on pharmaceuticals, and increases in demand as incomes improve and the population ages; and Constraints due to other sectors, including: inadequate infrastructure services that contribute to poor health outcomes (unsafe water, lack o f transport). 62. Health objectives were supported by the PRSC program with the main objective o f reducing inequities in health outcomes and ensuring financial protection for the poor. The sector objectives were also supported by the Bank through the IDA-financed HIV/AIDS Project approved in 2002, which received supplemental financing in 2007 and was extended to close in FY09. 63. The key CAS outcomes for health, as stated in the results framework, and the progress made toward those outcomes with Bank support, are listed below. 64. CAS outcome: Improvedaccess and quality of health services, more efficient healthservices and improved coverage of priority health programs, to be measured by number o f facilities implementing integrated management o f childhood infections (IMCI) vaccination coverage, number o f assisted deliveries, a 10 percent increase in immunization coverage, and ratio o f health personnel per capita and district. The measurable results were achieved and performance is satisfactory. Supported by the PRSC series and other donor budget support, the Ministry o f Health's approach to improve access to health services included: building health infrastructure in remote rural areas, deploying trained health personnel to these areas; and prioritizing the financing and provision o f services for those diseases that most impact the poor. Considerable progress was made in this area, most notably the allocation o f sufficient financing from the 2005 and 2006 budget for programs to combat HTV/AIDS, tuberculosis, and malaria, the expanded program for immunization, and the integrated management o f childhood infection (IMCI). The Government also identified which facilities to refurbish and better equip as well as where to buildnew facilities to improve accessto health services and reduce inequities. Based onthe demographic situation, the epidemiologic profile and the referral system, strategic plans are being prepared for the northern part o f Santiago, urban Praia, and Siio Vicente. There was a significant increase in general practitioners during the CAS period, (primarily due to Cuban cooperation) and 27 nurses specialized in obstetrics in 2006 were trained and dispatched to remote areas. Both schools o f nursingin Praia and Silo Vicente are training 100 student nurses that will graduate in 2009 and 2010, respectively. The coverage rate for access to health services has also reached a satisfactory 73 percent level owing to a growing investment in infrastructure in poor areas. 65. CAS outcome: Populationmore knowledgeable and with healthier behaviors, to be measured by population knowledge o f how to prevent HN/AIDS. This outcome was achieved and performance is satisfactory. The IDA multi-sector investment operation to fight I-IIV/AIDS, however, proposed indicators on behaviors related to HIV/AIDS, and these are the indicators that were tracked. With the support o f the HIV/AIDS project, the proportion o f municipalities providing voluntary counseling and testing for HIV/AIDS increased from 0 to 100 percent between 2003 and 2006. In terms o f practicing safer sex, condom use is reported to have increased from 18 percent to 30 percent for females and from 43 percent to 60 percent for men, according to a survey o f men and women between the ages o f 15 to 49 reporting on their last sexual interaction. 'Cape Verde Public ExpenditureReview on Health, May 2007, World Bank 53 66. CAS outcome: Improved financial access and sustainability of health services, to be measured by percentage of population covered by health insurance and financial ratios of health insurance. This outcome was achieved andperformanceis satisfactory.PRSCindicatorswere not aligned with the CAS indicators, and rather includedcontrollingthe increaseof non-communicablediseases and introducinghealth prevention and promotionprograms, as well as reformingthe social security systemto reduce expenditures on health. In 2006, the Government began publishingyearly statistical reports on key health indicators, completing a crucial step toward a concerted effort to prevent and treat non- communicable diseases. An analysis of non-communicable diseases by the national statistics agency (INE) and the World HealthOrganizationwas completed in 2007 to provide essential data on trends in non-communicablediseasesandhow to respondto them. Meanwhile, reformswere undertakento expand the social security system (INPS), includingintroducinguser fees. Some 14,000 civil servants hadhealth insurancecovered by INPS by the endofthe CAS period. The INPS posteda positivebalanceof CVE36 million in2006 and CVE27millionin 2007, enablingit to clear itsdebt to the central budget. Social Protection 67. About 173,000 Cape Verdeans live below the poverty line on incomes of about US$450 a year (2001-2002). Ofthese, 93,000 live in extreme poverty, on incomesof less than US$300 a year. Over half of those considered extremely poor live on the mainislandof Santiago, and two thirds live in rural areas. Creating a more sustainable social protectionsystemwas also a priorityfor Governmentgiven a relatively high unemployment rate, particularly in rural areas where agriculturalopportunities are limited. At the time of CAS preparation, labor-intensivepublic works schemes generated very low-paying temporary jobs inruralareas andhadnot built the skillsneededfor the servicessectors. 68. To appreciate the context for the objectives and achievements in the area of social protection during the CAS period, it is useful to have a sense of the framework that exists, which includes the elementsinthe followingparagraphs. 69. Temporary employment creation scheme: Createdinthe 1970s,the Frente aAlta Intensidade de Mano-de-Obra (FAIMO) was a labor intensive public works scheme which provided temporary employment, mainly in the form of civil works projects on roads and for soil conservation, for very low wages (half the extreme povertythreshold). Over time, this program has become equated with low labor productivity,limitedimpactof investmentsand little skillsaccumulationfor participants. A keyobjective of the IDA Social Sector DevelopmentProjectwas to help Governmentrestructure FAIMO and create a more efficient and productive institution, AGECABO, to execute public works. It has since been supersededby a community-ledsmall works programknownas Micro-realizapjes. 70. Two social security systems are financed with contributions from formal sector workers that together cover about one quarter of the labor force and pay pensions to about 6,000 retirees: the Public Administration(AP) plan, with contributionsfrom some 13,000 civil servants; and the NationalInstitute for Social Security (INPS) with contributions from about 31,000 private sector employees. In 2001, a framework law establishedthe principle for integratingthe two pension schemes. A final proposal for integratingthe pensionprogramswas translated into a law approved and implementedin2006. The 2006 PER includeda detailed analysis of the fiscal impact caused by the shifting of public workers into the contributory scheme managedby INPS. To date more than 11,000 workers have beentransferredand/or integrated into the INPS. The Government implemented important measures to ensure that financial contributionsto the INPS are made on time. However, there are still a number of issues to be resolvedto better harmonizethe pensionprogramsand improve their fiscal situations, and Governmentis considering what reforms needto be undertakenin this respect. The Growthand Competitiveness projectfinanced a 54 study on pension reforms and is supporting the payment o f liabilities incurredby Government duringthe transition period for civil servants transferred to the private pension scheme. 71. There are two non-contributory plans that provide income support to the poor: the Minimum Social Pension (PSM), which covers 6,500 elderly, handicapped and others in need o f critical support; and the Social Solidarity Pension (PSS) available to some 10,000 elderly workers who participated in the FAIMO for more than 10 years. These programs cost Government just under US$5 million a year and recent studies show they needto better target the poorest. 72. Lastly, there are social assistance programs that cover a variety o f services for vulnerable groups, including nutrition for poor children and the elderly, training for the disabled and subsidized water and sewer connections for poor urban households. The main actors include: the Department o f Solidarity at the Ministry o f Labor and Solidarity with overall coordination and oversight o f the sector; the Cape Verdean Institute o f Social Action for Education which covers school fees for low income students; the Cape Verdean Institute for Solidarity (ICs) and for Minors (ICM) which run programs for at-risk children; the National Programto Fight Poverty (PNLP), which i s a community-driven development-type program; and municipal government programs (day cares and other social services), and programs runby NGOs, religious groups and local associations. The challenge in this area is to strengthen systems for monitoring the performance and impact o f these programs. This would include redefining the regulatory framework for decentralized service delivery and updating the framework agreement for social protection services between the Ministryo f Labor and municipalities. 73. The basic issues for social protection concerned increasing efficiency, equity and coverage to fill specific gaps. Under the CAS, the Bank proposed to help Government prioritize social sector objectives, increase the private sector's contribution, and help create fiscal space for social protection spending. The PRSC series was designed to support improvements inthe coverage, targeting, effectiveness and financial sustainability o f the social protection system, including social pensions, social assistance, community development, and targeted programs to increase accessto social services and management o f food crises. 74. The key CAS outcomes for social protection, as stated inthe results framework, and the progress made toward those outcomes with Bank support, are listed below: 75. CAS outcome: Improved ability to plan and monitor social assistance services, to be measured by percentage o f target population with access to services and the number o f decentralized programs. Achievement o f this outcome is unclear. Under PRSC-1, the Government completed a Social Services Map which identified 609 social service centers, a critical first step to identify gaps and better target services, rationalize the use o f infrastructure, and improve the planning and monitoring o f decentralized services. The map i s accessible on the internet and provides complete up-to-date information on coverage and use o f services. PRSC 2 and 3 dropped some o f the focus on social services and these were not explicitly tracked. However, according to the PRSC series ICR, all social protection measures envisioned under the GPRSP were implemented, with the exception o f the establishment o f a c framework for decentralized service delivery. 76. Improved access by the poor to education, health and nutrition services: The Government strengthened collaboration with NGOs that provide social services to low income and vulnerable groups at the local level, including through 10 new agreements signed between municipalities and the NGOs. The Framework Law on Decentralization would allow further progress in this area by providing the regulatory framework for decentralized service delivery. As discussed earlier, the law i s beingdebated in Parliament. The Ministry o f Labor and Solidarity (MTS) has financed training for NGOs and local government staff to improve quality o f services. The Government tested targeted subsidies to encourage 55 access to education and health by the poor, including for secondary school fees and access to medicine. On this basis, the MTS increased support for secondary and vocational education for at-risk groups, reaching 184 students in 2005. With regardto increasingaccess of at-risk groups to healthservices, the Government decided that rather than providing subsidies it would pursue community-based health insurance as a moreeffectiveway o f achievingthis objective, followingthe results and recommendations of a study preparedby the InternationalLabor Organization. 77. CAS outcome: Expanded coverage and better targeting of the non-contributory pension schemes, as measuredby the percentage of social pension recipients in the lowest income quintile (no level proposed for indicator). This outcome is considered as having been achieved, however, and performance is satisfactory. The PSS and PSM have been integrated into one system with a unifiedMIS database; new digital ID cards have been issuedto beneficiaries and a revisedpoverty map was used to allocate additional pensions by municipalities. As a result, the number of beneficiaries increased from 14,446 in2005 to 18,462 in2007 and21,000 in2008. 78. Improved outreach and coverage of children at extreme risk, as measured by number of children receiving services and staff trained to receive children. Although these indicators were not explicitlytracked, performanceis considered satisfactory on the basis of other indicators. The Council of Ministers in February 2005 passed a resolution to establish a National Commission for Legal and InstitutionalReform for ChildrenandAdolescents, settingthe stage for a major overhaulofthe legislative and institutional framework to protect children. The ICM increased supervision of NGOs and local associations providingservicesto at-riskchildrenandyouth, includingupdatingdata on serviceproviders and helpingresolve implementation issues. The ICM's ChildEmergency Centerswere expandedin 2005 and the institutewas renamedthe Cape Verdean Institute for Children and Adolescents. Entities for the defense of children's rights were established in all municipalities, and the use of the Cape Verdean Institutefor Minors Child Emergency centers was expanded. In the health sector, there were significant improvements inthe availability of important specialties such as orthopedic surgery and general surgery, among others, and funding for priority health programs (e.g., tuberculosis, malaria), which fully matched the augmentedfunding levels inthe GPRSP. 79. Better prevention and managementof food crises, as measuredby the time betweencrisis and response.This indicatorwas nottracked and it is unclear what performancehasbeen. There was minimal progress in this area during the PRSC 1 and it was not tracked under PRSC 2 and PRSC 3. However, actions accomplishedunderPRSC 1mainly set the stage for more effectiveactions to preventfood crises. A food security survey was carried out and a NationalCouncilfor Food Security created in August 2005. These steps were to make it possible to estimate the number of families and the zones at nutritionalrisk and laythe groundfor a more coordinated approach, respectively. 111.CASContributionto GPRSPGoalsand Monitoring 80. The linksbetweenthe long-termgoals ofthe GPRSP and the CAS outcomeswere clearlyspelled out in the CAS Results Framework. However, as is often the case, evaluating Bank contribution to specific long-termcountry outcomes is not always possible, and it is often difficult to isolate the impact of World Bank support from that of other donors also supporting GPRSP implementation. Government leadership and ownership played a determining role in the success of reforms and activities for GPRSP goals; however, Bankreadinessto supportthese efforts are what also madethe difference. 81. The CAS states that monitoringand evaluation of Bank resultswould be aligned with that of the GPRSP, with the overall objective of ensuring easy and timely access to relevant data to monitor progress, evaluate the impact of the GPRSP and helping define new orientations or make changes based 56 on analysis of current data. To this end, the Government planned to implement an ambitious M&E system that integrated budget and financial management systems with technical aspects of program delivery, while also developing an integratedtechnologicalplatformfor the system, and providing open access for users to the main data warehouses. The Bank mobilizeda GPRSP Trust Fundto also support this effort. 82. There were significant delays putting in place the M&E system, although some progress was registered, including: establishing the Technical Secretariat for Development Assistance (STAD) in charge of coordinating M&E activities in early 2007; creating sectoral databases for agriculture and education; preparing a disaggregated povertymap; undertaking a pilot household survey of core welfare indicators(QUIBB) to track poverty, the final results of which were made available in the fall of 2008; and completion of the first two phases for establishingthe nationaldata bank for official statistics. The Governmentalso preparedan annual progressreport in July 2006 and is finalizinga draft implementation evaluation of the GPRSP. Other tools usedto monitor GPRSP progressincludeperiodicreportingon the MDGs; budget monitoringthrough PERs; sector budget executionand results of service delivery targets; and periodicsurveysto track povertyand access to services carriedout by the NationalStatistics Institute (NE). 83. To encourage Government to make further progress with the M&E framework, several actions were completed as prior actions for PRSC 3, including: analyzing the data of the QUIBB survey; completingSTAD staffing; and starting implementationof the trainingprogramdetailed in the Statistical Agenda. IV. Sustainability 84. There are strongprospectsfor sustainabilityofIDA supportto CapeVerde, given the context of a central Governmentthat is committed and leadingvisible and meaningfulreforms. Capacity is small and needs to be increased, and the decentralization agendais a priorityto strengthen municipalitiesand local institutions. 85. During the CAS period under review, two projects closed: The Social Sector Development Project and the Energy and Water Sector Project. The SSDP (rated Satisfactory at closing) helped strengthen institutional capacity at the central level, notably with the National Poverty Alleviation Program(PNLP), today an autonomousagencyunderthe MinistryofLabor, Familyand Solidarity,which continues to implement programs financed by IFAD and AfDB. Through AGECABO, the employment and contracting agency created under the PNLP, and the Delegated Contract Management Agencies (private local businesses andNGOs), the SSDP successfully replacedthe preexistingFAIMO systemthat had become unproductive with a new model for creatingjobs and alleviating poverty through a more competitive, private-sector oriented approach, with better pay for workers, while improving access to basic services through community public works. Seventeen municipalitiesreceived training in project planning and management, and these skills would have contributed to the project's sustainability. However, as reflected in the project ICR and comments made by the Borrower, the project did not provide as much capacity-buildingand support to municipalitiesand to the smaller firms and NGOs that implementedsub-projects as it had set out to do. The project boosted economic activity by supporting these organizations just as Cape Verde was moving to a market-based economy, but while some associations managedto find new financing, including from other donors such as the InternationalFund for AgriculturalDevelopment, others were not viable without the project.AGECABO closed its doors in 2006, althoughit hadbeenexpectedto functionwithoutthe project, accordingto the ICR. 57 86. With regard to the Energy and Water project,' the investments made to extend infrastructure services will need to be maintained in both urban and rural areas. Given the technical and financial difficulties of these sectors, it is unclear that the achievements under the project will be sustained. However, the Bank and other donors can improve the prospect for services to be sustainable through futuresupportto salvageElectraandrestoreits capacity. V. InstitutionalImpact 87. CAS operations includeda number of capacity and institutionbuildingactivities, and these have largelybeendiscussedinthe above sectionon CAS outcomes. VI. ExogenousFactorsand UnintendedNegativeImpact 88. Exogenous factors that affected CAS outcomes includethe high oil prices which hit the energy sector, the cost of living, and the depreciating dollar, which increased the cost of project activities. Contrary to a concern expressed in the CAS, the depreciating dollar did not dampen investments, which increased continually, particularly in tourism and real estate development. CAS implementation did not haveany unintendednegative impactsthat the countryteam is aware of. C.BANK PERFORMANCE I.Lending 89. Bank lending for FY05-09 was US$73 million, compared to a proposed base case of US$50 millionand a highcase ofUS$71million for the CAS period. The actual lendingamount through FY08, US$63 million, was determined by the IDA 14 envelope, which was largely front-loaded, but which benefited from internal reallocation and modest scale-up of resources (US$5 million) in FY08 due to Cape Verde's strong IDA performance and strong CPIA scorecard. The CAS triggers for the base case included: (a) continued satisfactory macroeconomic performance (PRSC trigger); (b) no more than one project with IDA commitment considered at risk; and (c) adequate budget allocationto GPRSP sectors; and (d) avoidance of accumulation of new domestic arrears, especially to suppliers and utilities beyond 0.2 percent of GDP. The high case triggers included: (a) no part of the portfolio considered at risk; (b) substantial implementationof priority actions of the CFAA, including presentation to Parliament of the executedbudget ofthe previousyear no later than six months after the end ofthe year, and submissionto Parliamentof the State's general accounts for the period 2000-2003; (c) completionof processto attract private partners in the transport sector, specifically the airline and the port, and (d) improvement in the investment climate, as measured by the reductionby half of the average time to establish an enterprise, using2002 as a pointof reference. 90. The high case triggers were partially met: (trigger a) All but one of the projects met their development objectives; the energy sector operationwas at risk ofnotmeeting its DOfor a periodoftime early in the CAS period, then turned around briefly, and ultimately closed Unsatisfactory. The implementation of CFAA actions were supported by the PRSC series, and the submission to Parliament of the State's general accounts for 1998-2005 were met (trigger b); as of 2007, the previous year's accountswere finalizedwithin monthsfollowingthe fiscal year's closing. Inaddition,quarterly accounts are prepared on a timely basis, and have been submitted to Parliament on a regular basis since 2004. Cape Verde made partial progress in the process to attract private partners in the airline and the port (trigger c); however, this objectivewas not fully achieved in the CAS period.The investment climate, as The ICR for this project will be produced in June 2009, six months after the December 2008 closing of the GEF grant component. 58 measured by the reduction by half of the average time to establish an enterprise (trigger d), was accomplished with the launching in Sgo Vicente and subsequently Praia of the "citizen's house'' services allowingbusinessesto be establishedregisteredinone day. 91. Despitemeetingthe highcasetriggers, disbursementsduringthe CAS periodreachedonly US63 million, due to the limitationsinthe IDA resources allocatedto CapeVerde. However, US$10million in budget support disbursed inJuly 2008 inthe new fiscal year (IDA 15 resources). Overall, US45 million of IDA support was disbursed through PRSCs I-IVYor 71 percent of the total. Investment projects were delivered as anticipated, with the exception of a proposed multi-sector private infrastructure project. Insteadthe Bank provided supplemental financing for the Growth and Competitiveness Project and the Road Sector Support Program. The proposedand actual lendingprograms for the CAS are presented in Table A2-2. 11. Analyticaland Advisory Activities 92. The Bank largelydelivered the AAA programas proposedinthe CAS, with the exceptionof two studies. A Rural Development Assessment was initiated but due to quality issues was re-launched in FY08 and was reoriented to focus on livelihoods and youth but was dropped in light of the priorities under the new CAS. However, a Fisheries sector review prepared as part of the work on rural development was well received and was converted into a stand-alone sector work. A Human Development Review was planned but not pursued. The AAA was generally well received by Governmentand also receiveda satisfactory assessmentby the Bank's QualityAssurancesGroup(QAG), which carried out a review of AAA in FY07. Annual PublicExpenditure Reviews provide an important basis for dialogue with Governmentandcoordinationwith IMF on policyandreformissuesas well as for defining the PRSC program. An integrated CFMCPAR was prepared in FY06 to assess progress in implementingfiduciary reforms and providedthe underpinningfor public financialmanagementreforms. An Infrastructure Regulation and Competitiveness Diagnostic Report and an Investment Climate Assessment (ICA) were prepared in 2006 and contributedto the dialogue on growth and improvingthe business environment. A Pension Study was preparedunder the Growth and Competitiveness Project to underpin policy recommendations for pension reform. The Poverty Assessment is being updated and expected to be finalized in FY09; however a Long-term Growth and Competitiveness Study was not initiated in FY07, and will instead be replaced under the new CAS with an initial labor market assessment. 93. Oneweaknesswith AAA disseminationstemmedfrom Governmentdelays or non-responsiveness to requestsfromthe Bank for their reactionto studiesor for agreementto publishthe reports, despitetheir expressedsatisfactionwith the reports mentionedto Bank staff. The Bank successfully disseminatedthe results of some importantAAA through workshops with central and local government as well as civil society, private sector and development partners. The Government initiateda working group following the ICA workshop to develop a strategy for implementingthe recommendations. That said, the QAG evaluationratedparticipation,consultation and disseminationofAAA as moderately satisfactory, andthis i s an area that the Bank should strengthengoingforward. 111. PortfolioAssessment 94. CapeVerde hashadthe top performingportfoliointhe Africa Region, barringthe performanceof the energy and water operation. That said, the portfolio is quite small, with three investment operations representingUS48.5 million equivalent, of which US$4 million was undisbursed, as of February 20, 2009. All operations are rated satisfactory. There are no problemprojects or commitments at risk. Over the CAS period, the portfolio has included five investment operations: (1) the Growth and 59 Competitiveness Project; (2) the Multi-SectorHIV/AIDS Support Project; (3) the Road Sector Support Program (RSSP); (4) the Energy and Water Project (IDA and GEF financed); and (5) the Social Sector Development Project. The RSSP is the youngest project, havingbecome effective in August 2005 and closingin 2010. The projects are implemented by Project CoordinationUnitswithin ministries,with the exception of the RSSP implementedby the Ministry of Infrastructure,Transport and Sea and the PRSCs, which are coordinated directly by the Ministry of Finance. To create synergies among the different PCU's fiduciary teams, they were co-located in one building. However, each PCU eventuallymaintained distinctfiduciary staff. 95. Grant financing was mobilized from several sources and played an important role in ensuring implementationof many CAS activities. In additionto the GEF grant for Energy and Water, there were IDF and JSDF grants to strengthenthejustice sector; an IDF grant to strengthen the court of auditors; a second poverty reduction strategy trust fund grant for public expenditure analysis, M&E, and other activities; and a PPIAF grant to strengthen capacity at ARE. The implementation of these grants contributedto the outcomesdiscussedearlier. 96. Changes in Task Team Leaders for two importantIDA infrastructureprojects and the PRSC IV weakened Bank performance by creating significant interruptionsand delays in the dialogue with Cape Verdean counterparts and subsequently in project execution. Due to the enormous demands on Procurement and FinancialManagement services for the Country Department's portfolio, and given the nature of the work, fiduciary assistance for project implementation was often late, though implementing agencies managed to navigate procurement and FM procedures with TTL support. In addition, the Country Team often had difficulties obtainingpunctual Bank technical expertise for very specific issues whichwouldhavecontributedto stronger dialogue with the Authorities. 97. A CAS Progress Report should have been preparedin FY07. However, with Cape Verde poised to access IBRD financingin 2008, the Bank decidedto moveforwardwith a new CAS instead. The new CAS is beingfinalizedin 2009, once the Bank's dialogue with the Authorities on the new growthagenda had clarified the priorities for the IDA and IBRD programs. A CAS Progress Report would have providedan opportunityto revisitthe CAS indicatorsand adjust the strategy as needed. IV. CountryDialogue and DonorHarmonization 98. The country dialogue is boosted by the strong performance of the Bank portfolio and the analytical work to support reforms. Cape Verde's eligibility for access to IBRD resources as of the new CAS should also strengthenthe dialogue. It is importantto note that the country will continue receiving concessional support from IDA for the foreseeable future and Cape Verde will be a blend (IDA and IBRD) borrower under the new CAS for FY09-12. In-country representation would significantly strengthencountry dialogue and shouldbe consideredseriously. 99. Coordinationwith donors has been significantly enhancedthrough the work of the joint Budget Support Group, which has strengthenedharmonizationthrough support for a shared policy reformmatrix agreed to with Government. The growth of the Budget Support Group has helped to increase coordination and harmonization. The GPRSP has also provided the basis for coordinating donor investment and budget support. While IDA has been the largest donor financier to Cape Verde recently, the UN is responsible for local donor coordinationand organizingRound Tables. The Bank is also a member ofthe Support Group for the Transition, organized by the Ministryof ExternalCooperationwith UNsupport to raise awarenessof the implicationsof CapeVerde's graduationto a MIC andto increase supportfor itscontinuedaccessto concessionalaid andother programsgenerallyreservedfor LDCs, 60 V. Client Feedback 100. As part ofthe preparationofthe CAS CompletionReport, discussions were heldwith CapeVerde officials on their views on Bank and project performance. This section presents some of the feedback providedduringthese discussions. 101. There was very positive feedback from the Ministry of Finance and the Ministry of Economy regarding the Bank's decision to channel an increasing amount of financing through the budget. The benefits cited includedgreater flexibility and predictability for Government to channel funds as needed, for example to meet the rising financing needs in health and pensions, or to finance TA without going through cumbersomeprocurement procedures. The PRSC Series, as part of the coordinatedand broader support of donors, was also instrumental in supportingall aspects ofpublic finance and helpingto ensure the sustainabilityof the financial systems and reforms established. As expressed by some officials, the challenge going forward is to transfer the fiscal discipline introduced at the central level to the municipalities. The work on PRSCs was also an important catalyst for bringing together the Budget Support Groupandwas consideredby Governmentto bemoreefficient thanthe projectapproach. 102. The Bank's management of the Cape Verde portfolio from Washington and Dakar was seen as less efficient than it would otherwise be if there were a local representation, and there was a general desire for an empoweredlocaloffice to be establishedwhich couldhelp make decisions more rapidly and facilitatecommunication. 103. There was a request for the Bank to do more on capacity building by supporting professional education and SMEs to better prepare the labor market for the opportunities growing in the services industry, and to be more responsive to Government requests for punctual TA. Bank analytical support was regardedas very useful and a reference source for Governmenton many issues, but there was also a concern expressedthat itwas somewhat supply driven. 104. For their part, project coordinators generally expressed an appreciation for having the independence to move more quickly than they believed would be possible within a line ministry. However, there was also a shared perception that the Bank neededto be more responsive in reacting to non-objectionrequests. 105. Despite the weak performance rating for the Energy and Water Project, both Government officials andthe projectstaff saidthat this hadbeenavery importantprojectfor CapeVerde andhadbeen successful in many ways. However, there was a general frustration with how the project was at times managed by the Bank, particularly in reference to how some procurement issues were handled which delayedprogresswith importantcomponents. It was suggested severaltimes that the Bank would needto remain engaged in the sector given the power sector's pivotal role in the economy and implications for the nationalbudget. 106. Some officials felt that the Bank should do more to reach the poorest, that budget support was invisibleto the population, and that the Bank should ensure that the focus on growth and infrastructure, which the private sector should handle, not come at the expense of supporting local communities. To addressthe needsof poor or workingclass communities, the Bank shouldfocus its support ontrainingfor small businesses (small fishermen, artisans, farmers) that can provide services or goods to the tourism sector, and increaseaccess to credit. Infrastructureand professional education were cited as the two key strategic themes for the Government's transformation strategy to succeed and as areas where the Bank shouldbe present going forward. 61 C. Conclusionsand Lessons GoingForward 107. Overall, progress toward achieving CAS outcomes was satisfactory and the Bank's performance was also satisfactory. Overarching (medium-term) objectives of supporting growth and reducingpovertywere achieved, and the Bank executed most of the activitiesit plannedand contributed to the envisioned outcomes, in linewith the GPRSP objectives. The shift to providinga greater share of IDA resources as budget support was successful, as it bolstered the reform program and strengthened country dialogue and donor coordination. The portfolio included a good mix of IDA investment operations and grant-projects that supported activities to complement the policy reform program supportedby the PRSCs and supported implementation of the GPRSP. The portfolio performance was satisfactory for most of the CAS period. However, the AAA programreflectedthe CAS priorities,though it wasn't executedin itsentirety. Key lessonsfor the Bank goingforwardincludethe following: 9 Exploreoptions to strengthenthe relationshipwith the client by increasingthe Bank's presenceand visibility in the country. A key theme that has been recurrent in discussions with Cape Verde is the desire to have a stronger Bank presence in the country and more supervision missions. This couldbe accomplished by establishing a local representation and more frequent missions by the Country ManagementUnit. > Increase outreachto civil society, includingthe parliamentarians,the private sector, politicalleaders, and opinionleaders(Le., the media) to strengthen disseminationof studies and analyticalwork; builda dialoguewith non-governmentactors; and increaseawarenessofthe Bank's support to CapeVerde. 9 Strengthenfocus onreducinginequalitybetweenislandsandbetweenurbanversusruralareas.Pursue analytical work to strengthen targeting mechanisms, as well as investment or TA support to improve opportunities, especially for underemployedyouth. 9 Giventhe fundamentalneedfor energyandwater servicesto supportthe rapidgrowthintourismand other services, as well as to meet the needs of citizens and improve the quality of life for the poorest, the Bank should rethink its strategy for supporting the sector under the new CAS, including to help Government invest in alternative renewable sources ofenergy. 9 Public-privatepartnershipsneednationalconsensusandsupportto besuccessful. Inthetransport and energy sectors, effortsto establish successfulPPPshavebeenundercut by a lack of genuine support for these. 9 The Bank should continue supporting Cape Verde's reform program through budget support, includingfor further strengthening of the investment climateand infrastructureservices, and to support the use of new IBRD resources to leverage private investments in growth-oriented infrastructure services that have an impact on poverty. Weak capacity, due to inadequatehumanresources, remains a key constraint for Government. The Bank should increase support for capacity-buildingto Government and ensurethat resources are utilized. 9 Someofthe risksanticipatedinthe CASwere realizedandtheBank shouldreflect onnewmitigation measures. For example, the increase in oil prices (an external shock) exacerbated the financial difficulties stemming from the delays in setting tariff or energy products and the payment arrears accumulatedby municipalities. This had repercussions on services as well as presentinga contingent liability for the budget. 9 The Governmentfaced some difficultiespreparingthe MTEFanddelays settingupthe M&E system, both of which were needed for better planning and monitoring of the GPRSP and indirectly CAS results. 9 Donors, including the Bank, should continue to provide Cape Verde with access to concessional financing and maintain other special economic arrangements to help the country make a smooth 62 transition to middle-income status and ensure that the development gains are notjeopardized. The Bank needs to look at M I C strategies that could be useful for Cape Verde and the experience in other similar countries, such as the Eastern Caribbean States. 63 Ec: d E .C / E .- E xm 8 Q r: 2 5 0 E 5 m I ru 0 Y 0 9 9 0 m rn od h 2 2 9 4 c d Y 52 E k Y W 0 b 0 0 0 t-4 t\l Table A2-3. Non-lendingServices and Actual Deliveries CAS PLAN(2/22/2005) COMPLETIONREPORT(12/31/08) FY Product Status 2005 InfrastructureRegulationand Deliveredto clientinFY06 CompetitivenessDiagnostic Report PublicExpenditureReviewUpdate Completed inFY06 CFAA ImplementationFollow-up Completed inFY06 2006 InvestmentClimateAssessment CompletedinFY06 Pension Study CompletedinFY07 2007 Review ofHumanDevelopment Dropped PublicExpenditureReviewUpdate Completed inFY07 RuralDevelopmentAssessment NotPrepared Additional ESW completed: FisheriesAssessment 2008 PovertyAssessment To be completedin FY09 Public ExpenditureReview Completed inFY08 Longterm GrowthandCompetitiveness Not prepared Study 72 Appendix 3 INTERNATIONALDEVELOPMENTASSOCIATION AND INTERNATIONALMONETARYFUND CAPEVERDE Joint World Bank-Fund Debt Sustainability Analysis Preparedby the staffs ofthe InternationalDevelopmentAssociation and the InternationalMonetary Fund Approved by Sudhir Shetty andCarlosBraga(WorldBank) andDavidNellorandPhilipGerson(IMF) November 7,2008 The risk of debt distress in Cape Verde remains low. Nevertheless, medium-termfiscal policy will reverse thepublic debt decline of recentyears. The total public debt-to-GDPratio isprojected to rise until 2012 and then decline thereafter-a path opposite that projected in the 2007 DSA. The temporary rise in external debt will be only partially offset by continued decline in domestic debt. Despite the rise, debt ratios remain manageable in all scenarios.Foreign direct investment (FDiJwill finance most of the external current account deficit, which will narrow as Cape Verde transforms itself into a services exporter. The main risks to the debt outlook are currency exposure and contingent liabilities. The risk of debt distress remains low under the baseline as well as alternative scenariosthat take those risks into consideration. 1. BACKGROUND5' 1, This DSA reviewsthe evolution of Cape Verde's public debt since the 2007 DSA6'and analyzes the projected debt path for the period 2008-28. Using the Fund-World Bank debt sustainabilityframework (DSF), it projects the baseline economic scenario and performs stress tests to assess whether debt distress will stay low. The thresholds for public external debt distress are those for countries like Cape Verde that have sound policies and institutions (Table 1).61 The baseline scenario was updated based on discussions with the authorities during the fifth review of the Policy Support Instrument (PSI) (September-October 2008). The discussions centered on the 2009 budget and the medium-term fiscal framework the authorities submitted to Parliament in October2008 alongwith the 2009 budget. 59 This analysis includes only central government debt and guarantees; it excludes municipalities and state-owned enterprises. 6o IMF Country Report08/37 and World BankReport44350-CV. Cape Verde's score on the World Bank's Country Policy and InstitutionalAssessment (CPIA) was upgradedin2007 from 4.1 to 4.2. Its average score for 2005-07 was 4.13, above the 3.75 floor for strongperformers. 2. Since the last DSA Cape Verde has continued to reduce public debt as a percentageof GDP and to change its composition (Table 2). Total public debt (domestic plus external) was reduced by 10 percentage points in 2007. Net domestic debt was pushed down to the original PSI benchmark o f 20 percent o f GDP two years ahead o f schedule; it is likely to reach 14 percent o f GDP by year-end, thanks to expenditure restraint as well as buoyant revenues. The proportion o f domestic debt in total debt was also reduced, reflecting efforts to reach out to development partners for concessional financing, making it possible to replace domestic with mostly concessional external borrowing. All external funds borrowed in 2007 were concessional. Cape Verde's main external creditors are IDA and the African Development Fund(Table 2). While the credit crunch inEurope is making it hard to roll over the nonbank private external debt, this totaled only 8 percent o f GDP as o f the end o f 2007 and is mainly long-term. Table 1. Cape Verde: CentralGovernmentExternal DebtRatios BaselineScenario Thresholds ' 2008 2018 2028 NPV of debt as apercentage of: GDP 50 25 26 21 Exports 200 56 42 30 Revenues 300 99 104 83 Debt serviceaspercentage of: Exports 25 5 5 4 Revenues 35 8 11 11 Source:Ministry ofFinance; and staffestimates. 'Basedon Cape Verde's 2005-07 classification as astrongperformer. * Excludinggrants. 3. The depreciation of the dollar in 2007 and 2008 was favorable to Cape Verde, but it revealed open currency positions (Tables 2 and 5). The nominal external debt-to-GDP ratio declined by 5 percentage points despite the fact that the dollar value o f the country's nominal external debt grew by US$ 58 million in 2007 (4 percent o f GDP). This is because the nominal GDP measured in dollars grew by 20 percent boosted by the appreciation o f the escudo relative to the dollar. The open currency exposure to the dollar results from the fact that the external liabilities o f the Treasury are denominated mainly in US$and SDR (which contains dollars), and the net foreign assets o f the central bank are mostly in euros. This raises questions about whether the authorities should swap part o f their foreign reserves in euros for dollars to cover the outstanding open positions or should prefer that future loans be denominated in euros. The authorities have made commitments inthe PSI and PRSC series to improve debt management, and the Fund and the Bank together will provide technical assistance (TA) on debt management in addition to the TA Cape Verde receives from Portugal. 74 Table 2. Cape Verde: CentralGovernmentDebt, 2004-08 2004 2005 2006 2007 2008 Actual Proi. (Percent of nominaldebt) Total 100 100 100 100 100 Nominalexternal debt 66 64 65 68 74 Multilaterals 51 50 51 57 64 Official bilaterals 13 12 12 10 8 Commercial 2 2 1 1 1 Domestic debt' 34 36 35 32 26 (Units indicated) Total US$million 842 802 919 959 936 Percentof GDP 89 81 75 65 52 Nominalexternal debt US$ million 553 513 598 656 694 Percentof GDP 60 51 50 45 38 Domestic debt' US$ million 288 289 322 303 243 Percentof GDP 29 30 25 20 14 Memorandum item: GDP (US$million) 918 1,006 1,203 1,443 1,826 Source:Cape Verdean authorities, staffestimates and projections. 'NetofdepositsandobligationswiththeTrustFund. 2. MEDIUM-TERMBASELINE SCENARIO 4. The long-term macroeconomicscenario is projected to revolve over the next20 years around two axes: economic transformation toward a service-based economy, and accumulation o f international reserves and government deposits at the BCV. 5. The growth forecast is designed to test the robustness of the conclusionsof this DSA. Because o f the financial and commodity price shocks in 2008, short-term growth was revised downward and inflation upward compared to the previous DSA (Table 3). For the outer years, the previous assumptions are maintained: real GDP is expected to grow by 5 percent inthe long term (5 to 20 years), which is a prudent 2 percentage points below the historical average (1 standard deviation). Growth will be driven by the transformation into a service-exporting economy, financed mostly by FDI. Moreover, the projections do not consider the growth-promoting effect o f public investment in infrastructure. 75 Table 3. Cape Verde:Macroeconomic Baseline Assumptions, 2008-28 Average 5 Years Ahead 6-20 Years Ahead (1998-2007) 2007 DSA CurrentDSA 2007 DSA Current DSA RealGDP growth rate (percent) 7.2 7.3 6.6 5.2 5.1 Inflationrate (percent) 3.1 2.3 3.4 2.0 2.0 Exportso f goods and services(percent of GDP) 32 47 48 58 65 Importsofgoods andservices (percent o fGDP) 65 78 71 82 78 Financingneeds(percentofGDP)' ... -1.0 -2.5 -2.7 -0.4 Grant elementofnew external borrowing ... 28 16 10 9 Public revenueandgrants (percent ofGDP) 30 29 28 28 27 Primarypublic deficit(percent of GDP) 4.9 1.6 2.7 1.3 0.8 Source:National authorities, staffestimatesandprojections. ' Currentaccount plus foreign direct investment. 6. The economictransformationis marked by an increasein importsand service exports and by a decrease in reliance on remittances and other current transfers. Cape Verde is expected to break its past dependence on aid and remittances as it continues to transform itself into a self-propelled economy. While the fuel and food shock increased the import bill in 2008, the restraint in recurrent expenditures created fiscal space that has enabled the government to expand social transfers to protect Balance of Payments Source of Financing, 1995-2007 the vulnerable without putting pressure on the 1996 2007 balance o f payments. As a Tourism FD, ODA Tourism result, foreign reserves will 4% 12% Remmancea 2 stay above 3 months o f imports and continue to grow through the forecast horizon. FDI will drive and .-. finance the current account 46% 18% deficit and keep debt- Source: National authorities generating flows close to The transformation of the Cape Verdean economy 100 balance. The debt- Balance of payments generating inflows needed 80 _ _ _ _ _ _ _ _ c _ _ - - - - - - - - - to finance the current -' ,..*----------- account deficit are likely to '\ Imports of goods II 60 be largely unaffected if 0 and sedces FDI is below baseline t! 40 projections owing to the n self stabilizing dynamics o f "n 20 the current account relative to FDI (imports would 0 decline intandem with FDI . * * . ^ _ _ _ _ _ _ . ^ * - -Current account thanks to its high import content). Despite a 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 possible deceleration caused by global financial turmoil, the prospects for FDIinflows in the medium term continue to be bright. New commitments approved by the Investment Promoting Agency support the expectation that the private investments will materialize. 76 7. The baseline scenario projectsthat internationalreserves will continue to accumulate, as will government deposits at the BCV. The prudent fiscal policy implemented in the PSI is assumed to continue through the forecast horizon, with foreign reserves building up. This assumption is based on two facts: a. In October 2008 the authorities submitted to Parliament a medium-term fiscal framework for 2009-20 11 that indicates a prudent fiscal policy. Although the policy reverses the recent decline in public debt, it preserves a stable debt path that allows for public investments in infrastructure and social transfers. b. The authorities announced in the Letter of Intent for the 5' PSI review that they intend to continue with a PSI for at least four more years, until 2013 (a I-year extension of the current PSI followed by arequestfor anew 3-year PSI). Based on these facts, net domestic borrowing is projected to be contained in the next 20 years, allowing net domestic debt62to land softly at about 11 percent of GDP. This fiscal restraint is needed to accomplish the authorities' goal of increasing reserve coverage by 0.1 month of prospective imports each year, reaching 5.7 months by 2028 (equivalent to 41 percent of GDP). Financing the reserve accumulation requires that the Treasury make annual deposits of about 1.2 percent of GDP at the BCV. Usingthe balance sheet approach, this result assumes that the authorities' efforts to develop the domestic securities market will allow the domestic private sector to absorb about 19 percent of GDP in Treasury securities by 2028 (Table 4). 45 ,GDP The accumulation of netforeign assets (NFA) and Treasury deposits I 40 alance sheet of the Bank of Cape Verde (projections) 35 Treasurv Treasury SltS 30 25 20 15 10 5 0 2008 2008 2013 2013 2018 2018 2023 2023 2028 2028 AssetsLiabilities AssetsLiabilibes Assets Liabilitres AssetsLiabilities AssetsLiabilibes 8. The baseline scenario assumes a faster rise than the previous DSA in the share of nonconcessional external borrowing. While Cape Verde will continue to have access to concessional loans from IDA and others,63this DSA assumes that Cape Verde will increasingly take out nonconcessional loans to finance growth-enhancing public investments. It is assumed that the average grant element of all external borrowing will decline to less than 10 percent by 2028. This 62Net of governmentdeposits. 63Cape Verde is a "blend country" as it is eligibleto IBRDand IDA funds (under the "small islandexception"). 77 assumption is justified by the recent graduation of Cape Verde from the U.N.'s least-developed country category and nonconcessionalloans envisaged with the European Investment Bank (EIB), the IBRD, andthe OPEC Fund. This assumption is useful for probingthe resilience of the debt path to less favorable borrowingterms.64To further test resilience in stress scenarios,the grant element of marginaldebt65is negative because it is assumedthat under stress conditions the country would be chargeda risk premiumof 100basispoints abovethe marketrate.66 Table 4. BalanceSheet Approach: IntersectoralPositionswith the Treasury, SelectedItems (in percentageof GDP) Treasury Bank of Cape Verde 2008 2028 2008 2028 Assets 7 15 Assets 31 43 Deposits at the BCV 5 15 Net ForeignAssets 22 41 Deposits in banks 2 0 Claims on the Treasury 3 0 Other items(net) andTCMF 7 1 Liabilities" -20 -26 Liabilities -31 -43 With the BCV -3 0 Money base -19 -23 With banks -11 -6 BCV bills (sterilization) -4 -4 With non-banks -7 -19 Deposits ofthe Treasury -5 -15 Equitycapital -4 -1 Net domestic debt -14 -11 Domestic BankingSector Domestic non-bankingsector 2008 2028 2008 2028 Assets 71 85 Assets ... ... NetForeignAssets 2 0 Treasury 7 19 Reservemoney and cash 12 15 Bankdeposits 69 84 Treasury securities 11 6 Cash 7 8 BCV bills (sterilization) 4 4 Privatecredit 46 60 Other items (net) and TCMF -4 -1 Liabilities -71 -85 Liabilities ... ... Deposits -69 -84 Bankloans -46 -60 Deposits ofthe Treasury -2 0 Source: IMF and IDA staffs' projections. I/ExcludesTCMF. 3. EXTERNAL DEBT SUSTAINABILITY BASELINE SCENARIO 9. Although the recent decline in external debt will be temporarily reversed because borrowingto finance public investmentswill accelerate, it will remain below the threshold. In the previous DSA, external debt was expectedto decline continuously.The reasonfor the difference is the new funds Cape Verde recently secured for public investments, especially from the EIB and the IBRD. The finding that this temporary rise in external borrowing will not jeopardize debt sustainability repeats the finding of the 2007 DSA that a 5-year scaling-up of nonconcessional borrowing is consistent with debt sustainability. The average grant element of the new borrowing 64 The Fundand the Bank will provideTA to Cape Verde on debt management to enable the authorities to ensure that hture nonconcessionalborrowing is consistent with debt sustainability, especially because the nonconcessional borrowing will double the external interest bill through 2028. 65"Marginal debt" is debt takento cover the gap created by the shock simulated in the stress scenarios. 66 CIRR (Commercial Interest Reference Rate). 78 will be especially low during 2009-2011 when the EIB loan will be disbursed. The debt service ratios will rise gently but stay below the stress thresholds. This rise in debt service indicators results from the decline in concessional financing and the assumed shortening o f amortization periods. Because in this DSA the grant element o f new borrowing is projected to decline faster than in the previous one, the rise in debt service ratios will be frontloaded rather than backloaded, as it was in the previous DSA. ALTERNATIVE AND STRESS SCENARIOS 10. The risk of external debt distress is low even with depreciation and an abrupt worsening of borrowingterms. The debt ratios remain far below their thresholds in all alternative and stress scenarios, including the scenario where all new borrowing is 200 basis points above the baseline rates (Figure 1 and A2 Table 6). This finding reinforces the conclusion that nonconcessional borrowing is unlikely to jeopardize debt sustainability. The extreme scenario is a currency depreciation, which highlights the need to hedge open currency positions to support the peg. This result is a corollary to the cautionary note about the country's currency exposure (7 3).67In the historical scenario, the external debt ratio rises for a longer period o f time because FDI is less than in the baseline, but it also declines faster in the outer years because the historical scenario implies faster growth and a smaller external deficit. The historical scenario should be interpreted with caution because it does not take into account that in a highly open economy like Cape Verde the current account self-stabilizes to some extent to fluctuations o f FDIand growth. 4. TOTAL DEBT SUSTAINABILITY BASELINE SCENARIO 11. The trajectory of total publicdebt contrasts with the previous DSA becauseit reverses the decline observed in recent years. In the baseline scenario, the NPV o f total public debt as a percentage o f GDP is expected to rise until 2013 and decline thereafter. In the previous DSA it was expectedto decline inthe short term and stabilize inthe outer years. The risingtrajectory is expected in spite of the faster decline in domestic debt because external borrowing is expected to be larger than in the previous DSA in order to finance public investment in infrastructure. Yet, public debt is sustainable because the baseline scenario maintains the assumption o f the previous DSA that the fiscal policy pursued in the PSI and PRSC series to preserve sustainability will continue through 2028. In particular, the government is expected to hold domestic debt at about 11 percent o f GDP, which will require it to decelerate public investment over time to make space to pay the interest on current nonconcessional borrowing. The expectation is supported by the medium-term fiscal framework the authorities submitted to Parliament in October 2008 and by the depth o f their commitment to sound policies. Sales o f coastal land to tourism developers will also enhance fiscal performance. Therefore, we find that debt is sustainable inthe baseline scenario. ALTERNATIVE SCENARIOSAND STRESS TESTS 12. Although the macroframework is robust to alternative assumptions and shocks, the DSA highlights the importanceof fiscal discipline. The alternative scenarios tested are68(i) real GDP and primary balance at historical averages; (ii) primary balance unchanged from 2008; and (iii) `'The hump-shaped path for the historical scenario (Figure 1, red dotted line) was preserved for completeness of this DSA. However, it i s not informative because the baseline assumptionson the current account and GDP powth are more pessimisticthanthe historical scenario. Table 8, alternative scenarios A1-3. 79 permanently lower GDP growth.69 All debt ratios remain within sustainable levels under all the alternative scenarios. Inthe extreme stress test for the debt-to-GDP ratio, the annual fiscal deficit is 10 percent o f GDP for 2009-2010, which is 7 percent o f GDP larger than the baseline primary balance. This simulates a situation where, for example, hypothetical contingent liabilities equivalent to 7 percent o f GDP materialize in two consecutive years. For the debt service ratio, the extreme stress is a 30 percent depreciation o f the escudo. All debt ratios remain manageable during the forecast horizon under all stress tests. 13, While conclusive information is not yet available, contingent liabilities arising from state-owned enterprises may be a risk for the debt outlook. This risk was taken in consideration inthe risk assessmento f this DSA under the extreme stress test for the debt-to-GDP ratio. This test shows that all debt ratios remain manageable even if contingent liabilities amounting to 7 percent o f GDP materialize in two consecutive years. There are explicit and implicit risks: the explicit guarantees" provided to state-owned enterprises represent a fiscal risk o f 4.5 percent o f GDP at the end o f 2008. The implicit fiscal risks are currently being assessedby the government, especially the amounts needed to recapitalize some state-owned enterprises. For example, the electricity and water supplier, Electra, had losses equivalent to 1.3 percent o f GDP in 2007, which erased about half o f its net worth, and it may suffer further losses in 2008 and the following years until the more efficient generators now under construction start operating. The government is taking action supported by the PSI to assess these fiscal risks by compiling an aggregate balance sheet and the net gains or losses o f the largest state-owned corporations; it will report the fiscal risksto the Council o fMinisters early in 2009. This should encourage prompt action to address the risks, such as allowing the private sector to participate in infusingcapital into state-controlled enterprises. 5. CONCLUSIONS 14. The DSA concludes that the risk of debt distress is low and highlights Cape Verde's strengths as well as vulnerabilities.Evenwith extreme shocks, public debt is on a sustainable path, given continued fiscal discipline and the economic transformation caused by expansion o f service exports and FDI. While the decline in public debt observed in recent years is being reversed, the DSA shows that using nonconcessional funds to expand public investment will not jeopardize debt sustainability as long as the expansion is temporary and recurrent expenditures remain controlled. This conclusion holds even ifthe expansion o fpublic investments in infrastructure does not generate the expected growth returns, because no growth-enhancing effect o f infrastructure is assumed. It is, however, critical that Cape Verde strengthen its debt management. In particular, it needs to conduct DSAs regularly to set a borrowing envelope for the next year's budget and an MTFF consistent with debt sustainability. Two important vulnerabilities identified in the DSA also need to be addressed: the public sector's unhedged currency exposures and the contingent liabilities for state-owned enterprises. The authorities are preparing to address these vulnerabilities as they firm up their debt management. 69 Assumes that real GDP growth is at the baseline minus one standard deviation divided by the length of the porojectionperiod. Domestic debt issuedby state owned enterprises. 80 81 3 00 0 vi m N O5 N m '0- 6 ri d 2 m a: *we vi '101 0; 0 0 ' 0 N N - w 2 : 82 Table 6 Cape Verde Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2008-2028 (In percent) Projections 2008 2009 2010 2011 2012 2013 2018 2028 PV ofdebt-to GDPratio Baseline 25 27 28 28 28 28 26 21 A. AlternativeScenarios A I Key vanablesat their histoncal averagesin 2008-2028 I/ 25 26 26 28 29 30 32 23 A2. New public sector loans on lessfavorableterms ~n2008-2028 2 25 29 31 32 33 33 34 34 8.BoundTests 81.RealGDPgrowthathistoncal averageminusone standarddeviauonin2009-2010 25 27 28 29 29 29 27 22 82. Exportvalue growth a histoncalaveraae minusone standarddeviation in 2009-2010 31 25 30 38 38 36 34 27 21 B3. USdollar GDP deflator at histoncal average minusone standarddeviauon in 2009-2010 25 30 33 34 34 34 31 26 64 Net nondebt creaung flaws at historical average minusone standarddeviauon m 2009-2010 41 25 25 21 23 24 24 25 21 85.CombinauonofB1.64 usingone-halfstandarddeviabon shocks 25 25 26 27 28 28 28 23 66. Onetime 30 percent nominaldepreciauonrelative to the baselinein 2009 51 25 38 39 40 40 40 36 30 PVofdebt-to-exports ratio Baseline 56 60 58 58 57 55 42 30 A. Alternrtive Scenarios AI. Key vanablesattheir histoncal avenges in 2008-2028 11 56 58 56 57 59 60 53 32 A2. New public sectorloans on less favorableterms in 2008-2028 2 56 65 65 66 67 66 55 47 B. Bound Tests BI. RealGDP growth at historical averageminus one standarddeviation in 2009-2010 56 60 58 58 57 55 42 30 B2. Exportvalue growth at histoncalaverage minus one standarddeviauon in 2009-2010 31 56 72 98 92 87 81 53 36 B3. US dollar GDP deflator at histoncal averageminus one standarddeviation in 2009-2010 56 60 58 58 57 55 42 30 84. Net nondebtcreatingflows at histoncalaverage minus one standarddeviation in 2009-2010 4/ 56 55 45 47 48 48 41 30 B5 Combinabonof BI-84 usingone-half standarddeviation shocks 56 54 52 54 54 54 44 31 86 One-time 30 percentnominaldepreciabonrelative to the barelinein 2009 51 56 60 58 58 57 55 42 30 PV of debt-to-revenue ratio (excluding grants) Baseline 99 109 112 117 117 115 104 83 A. Alternative Scenarios A I Key vanablesattheir histoncalaveragesin 2008-2028 I/ 99 105 108 II4 120 124 1.30 89 A2. New public sector loanson less favorableterms I"2008-2028 2 99 118 126 133 136 137 136 132 B. Bound Teats BI RealGDPgrowth at histoncalaverage minusone standarddeviation in 2009-2010 99 Ill 116 121 121 119 107 86 B2. Exportvalue growth at histoncalaverage minusone standarddeviauon in 2009-2010 31 99 122 157 I55 149 141 109 83 83. US dollar GDP deflator at histoncalaverage minus one standarddeviation in 2009-2010 99 119 136 142 142 140 126 101 84. Net nondebtcreatingflows athistoncalaverage minusone standarddeviauon in 2009-2010 41 99 100 86 94 98 IO0 100 83 B5. Combinationof 81-84 usingone-half standarddeviabon shocks 99 101 I04 112 II5 116 112 91 B6.One-time 30 percentnominaldeprectabannlauve to the bzseline8" 2009 5/ 99 154 I58 165 165 162 146 117 82 83 Table 6 Cape Verde: Sensitivity Analysis for Key Indicators of Public and Publicly GuaranteedExternal Debt, 2008-2028 (continued) (In percent) Projections 2008 2009 2010 2011 2012 2013 2018 2028 Debt serviceteexports ratio Bmseline 5 4 4 4 4 4 5 4 A. Alternative Scenario8 AI. Keyvanablesat theirhistoricalaverqes in 2008-2028 11 5 4 4 3 4 5 6 6 A2 Newpublic sector loanson less favorableterms in 2008-2028 2 5 4 4 4 4 4 3 3 B. Bound Tests 81.RealGDPgrowthat histoncalaverageminusone standarddeviauonin2009-2010 5 4 4 4 4 4 5 4 82 Exportvalue growh at histoncalaverageminusone standarddeviationin 2009.20 1031 5 5 6 9 8 8 1 5 83 USdollar GDP deflatorai histoncalaverageminusone standarddeviauonin 2009-2010 5 4 4 4 4 4 5 4 84 Netnondebt creatingflowsat histoncalaverageminusone standarddeviationin 2009-2010 41 5 4 3 2 2 3 4 4 85 Combmauonof81-64 usingone-halfstandarddeviation shocks 5 4 3 2 3 3 4 4 86. One-ume 30 percentnominaldepreciaaonrelativeto the baselinein 2009 51 5 4 4 4 4 4 5 4 Debt serviceto-revenue ratio Baseline 8 8 8 1 8 9 11 I 1 A. Alternative Scenarios A1 Keyvanablesat theirhimncal averages in 2008-2028 I/ 8 8 7 1 8 10 16 16 A2 Newpublicsectorloanson less favorableterms in2008-2028 2 8 8 8 8 8 8 1 1 B. Bound Tests B I . RealGDPgmwh at histoncalaverageminusone standarddeviauonin2009-2010 8 8 8 8 8 9 12 12 82. Exportvaluegrowthat histoncalaverageminusone standard deviauonin 2009-2010 31 8 8 10 14 14 I 5 15 II 83 US dollar GDP deflatorat histoncalaverageminusone standarddeviationin 2009-2010 8 9 9 9 I O II 14 14 84. Net nondebt creatingflowsat historicalaverageminusone standarddeviationin 2009-2010 41 8 8 6 3 4 6 9 II 85.CombinationofB1-64 usingone-halfstandarddeviahonshocks 8 8 6 5 6 7 11 I 2 B6.One-time30 percentnominaldepreciationrelativeto the baseline in 2009 51 8 II II II II 13 16 16 Memorandumr i m : Grantelement assumedon residualfinancing(I e ,financingrequiredabovebaseline)61 -4 -4 4 4 -4 4 -4 4 Source. Staff projectionsandsimulations I/VanablesincluderealGDPgrowth,growthofGDPdeflator(inU.Sdollarterms),non-interestcurrentaccountinpementofGDP,andnondebtcreaungflows U Assumesthatthe interestrate on new borrowingIS by 2 percentagepointshigherthan inthe baseline..whilegrace andmaturityperiodsare the sameas mthe baseline. 31Exporn values are assumedto remampermanentlyat the lowerlevel,butthe currentaccount as ashare o f GDP is assumedto returnto its baseline levelafter the shock (implicitly assummgan offsettingadjustmentin importlevels.) 41Includesofficial and pnvatetransfers and FDI. 51Depreciationis definedas pementagedecline indollarflocalcurrencyrate, suchthat it neverexceeds 100percent. 61Negativenumbersindicate interestrateshigherthe marketrates Appliesto all N e s s scenariosexceptfor A2 (less favorablefinancmg) inwhichtheterms on a11new financingare as specifiedin fwmote 2. 83 84 Figure 1. CapeVerde: Indicatorso fPublic andPublicly GuaranteedExternalDebt under AlternativesScenarios,2007-2028 1/ a. Debt Accumulation , b.PV of debt-toGDP ratio 20 50 m m m m m m 1 1 1 1 - Threshold:50 40 30 .~ ....................................................................................................................... '%,, 20 ........................... 10 hRat?%ebt 2023 2028 Accf%!on 0 -Grant elementof new borrowtng(% nght scale) 2012 2017 2022 2027 II Grantsand implicitgrants (% of GDP) d. PV o fdebt-to-revenueratio (excludinggrants) 175 7 I Threshold:200 Threshold:300 100 , I 5 0 - 71:: 100 - 75 1 - 1 25 - , , , 0 4 I 0 2012 2017 2022 2027 2012 2017 2022 2027 f.Debt service-to-revenueratio 25 Threshold: 25 Threshold: 35 20 - &? .................,, ............... 4.' ................... .............................................. .................................. - 0 4 I 0 4 2012 2017 2022 2027 2012 2017 2022 2027 -Baseline Historicalscenario Most extreme shock l/ 2007 DSA Source: Staffprojectionsand simulations. l / The most extremestresstest is the test that yields the highest ratio in 2018. In figure b. it correspondsto adepreciationshock; in c. to aborrowingcost shock; in d.to adepreciation shock; in e. to aexport shock; and in picture f.to adepreciation shock. 84 - :I m m O P C vi P O i: i drd m m m n o d O c. d d d ~ o P ~~ oW -O0 0 0 0 0 ~ H ~ W ~ V I o Wo o o o y f 7 N ' F W, : h fi : s P P , m m : o o q - w N O m o p F :: r5 F 5 P E N - m m W N P -g - 0 P m 2 c w - ? nN sPo0,zN, N m - P P O , ~ - n q a o' Table 8. Cape Verde: Sensitivity Analysis for Key Indicators of Public Debt 2008-2028 Projections 2008 2009 2010 2011 2012 2013 2018 2028 PV of Debt-to-GDP Ratio Baseline 38 39 39 40 40 40 37 32 A. Alternative scenarios AI. Real GDP growth and primary balanceare at historical averages 38 39 42 45 46 47 57 77 A2 Primary balanceis unchangedfrom 2008 38 34 31 29 26 22 14 4 A3. Permanently lower GDP growth I/ 38 39 40 42 43 43 46 63 B.Boundtests B I Real GDP growth is at historical average minus one standard deviations in 2009-2010 38 40 42 44 45 45 46 48 B2 Primary balanceis at historical average minus one standard deviations in 2009-2010 38 46 53 54 53 52 . 47 40 63.Combination ofB1-BZ using onehalfstandarddeviation shocks 38 43 48 49 49 49 47 45 B4 One-time 30 percent real depreciation in 2009 38 49 49 49 49 48 46 45 B5 I O percentof GDP increasein other debt-creating flows in 2009 38 39 50 50 49 47 42 34 PV of Debt-to-Revenue Ratio 2/ Baseline 131 130 140 152 150 148 137 120 A. Alternative scenarios A I Real GDP growth and primary balance are at historical averages 128 132 148 168 169 173 212 293 A2 Primary balanceis unchangedfrom 2008 128 115 111 110 95 83 51 13 A3 Permanently lower GDP growth I/ 128 132 143 158 157 159 170 236 B. Bound tests B I Real GDP growih is at historical average minus one standard deviations in 2009-2010 128 133 149 165 165 166 170 179 B2. Primary balance is at historical average minus one standard deviations in 2009-2010 128 153 190 203 196 192 176 152 B3. Combination of BI-B2 using one half standarddeviation shocks 128 143 171 186 182 180 175 173 B4. One-time 30 percent real depreciation in 2009 129 164 173 185 180 177 170 169 B5. 10 percentof GDP increasein other debt-creating flows in 2009 128 130 176 187 180 175 155 I28 Debt Serviceto-Revenue Ratio 2/ Baseline 16 14 13 14 14 I S 18 20 A. Alternative scenarios A I Real GDP growth and primary balanceare at historical averages 16 14 14 16 18 19 32 59 A2 Primary balanceis unchangedfrom 2008 1 6 1 4 8 7 6 3 0 0 A3 Permanently lower GDP growth I1 16 14 14 14 15 16 23 44 B. Bound tests B1 Real GDP growth is at histoncal average minus one standard deviations in 2009-2010 16 14 14 15 16 17 24 33 BZ Primary balanceis at historical averageminus one standard deviations in 2009-2010 16 14 21 26 21 23 28 28 83 Combination of BI-BZ using one half standard deviation shocks 16 14 18 21 19 21 26 32 B4 One-time 30 percentreal depreciation in 2009 16 16 17 18 19 20 28 40 BS 10 percent o f GDP increasein other debt-creating flows in 2009 16 14 13 14 14 15 18 20 Sources Country authorities, and staff estimatesand projections I/AssumesthatrealGDPgrowthisatbaselineminusonestandarddeviationdividedbythelengthoftheprojectionperiod 21Revenuesare defined inclusive of grants 86 Figure 2. Cape Verde: IndicatorsofPublic DebtUnder Alternative Scenarios, 2007-2028 1/ - Baseline ---mmaybalanceat 2008 level 60 50 40 30 20 I O -..--------------------_------_ 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 250 PV of Debt-to-Revenue Ratio 2/ .^ Debt Service-to-Revenue Ratio 2/ . --- 0 -L I I 1 1 I I I I I I I I 2008 2009 2010 2011 2012 2013 2014 2015 2016 20'17 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Sources: Country authorities; and staffestimates andprojections. 1/ The most extreme stress test is the test that yields the highestratio in2018. 21 Revenues are defined inclusive of grants. 87 Appendix 4 ConstraintsReportedby Enterprises CapeVerde and ICA Comparator Countries - Cape Senegal South Mauritius Philippines Indonesia Maldives Guyana Dominican Verde (2003) Africa (2005) (2003) (2003) (2005) (2004) Republic (2005) (2003) (2005) Electricity 63.2% 34.7% 9.2% 12.6% 33.4% 22.4% 19.6% 41.0% 84.4% Access to Financing 49.3% 61.5% 12.8% 32.6% 13.5% 17.7% 72.3% 30.7% 35.6% Tax Rates 47.3% 52.1% 19.0% 28.4% 30.4% 29.4% 32.6% 16.7% 50.6% Cost of Financing 45.6% 73.8% 16.3% 48.1% 23.0% 28.8% 67.4% 55.8% 50.0% Informal Sector Competition 36.6% 51.0% 15.8% 38.5% 24.3% 17.3% 14.9% 12.5% 51.7% Trade Regulation 2.7% 39.3% 16.6% 23.2% 21.7% 16.0% 6.1% 18.4% 17.8% Transportation 22.3% 34.7% 10.4% 14.9% 18.3% 16.7% 17.6% 16.7% 21.7% Tax Administration 21.8% 51.1% 10.4% 21.7% 25.1% 29.4% 5.0% 8.7% 27.8% Crime, theft disorder 20.5% 18.6% 29.3% 25.4% 26.5% 22.3% 35.4% 30.1% 60.0% BusinessLicensing 16.7% 8.2% 3.4% 46.4% 13.5% 20.7% 2.0% 6.1% 10.6% LabourRegulation 16.7% 14.0% 33.3% 26.9% 24.7% 26.0% 24.0% 10.6% 16.1% Legal System 16.0% 13.5% 8.7% 23.0% .-- 24.9% 42.6% 8.1% 31.7% Corruption 15.2% 45.8% 16.3% 37.8% 35.2% 41.9% 40.0% 17.8% 75.0% Macroeconomic Instability 11.5% 31.2% 33.6% 38.5% 38.4% 50.2% 10.2% 44.2% 60.0% Telecommunications 9.0% 3.5% 3.6% 5.5% 11.3% 9.1% 3.9% 24.7% 2.8% Access to Land 7.2% 32.0% 3.3% 21.9% 14.8% 13.1% 64.0% 27.8% 10.6% Worker Skills and Education 4.5% 20.8% 35.4% 42.1% 11.9% 19.1% 25.0% 40.4% 35.6% I I I I I I I I I I Source: IFC, Cape Verde InvestmentClimate Assessment, 2006 88 Appendix 5 Poverty Map 1. A poverty map has been prepared by combining the data from the IDRFsurvey administered in2000/01andthe Populationand HousingCensus conducted in2000. The Census database includes data on 424,600 individuals and 92,200 households. The country is divided into four administrative levels. First, the nine Ilha (island) are the most aggregated level and are the basis for the IDRF sample design. The second level consists o f 17 Concelhos (Departments) and this is followed at a third level by the 31 Freguesis (communes). A fourth, neighborhood level, was investigated but the population is too small to yield precise enough poverty estimates. There are 401 entities at that level. Based on experience in other countries, around 1000 households per administrative unit are needed to obtain poverty statistics with a decent level o f precision. Only a handful o f Freguesi have more than 1000 households. Table 1: Descriptive Statisticson CapeVerde's Administrative Structure Administrative # of Number ofHouseholds Number of Individuals Units Units Median Minimum Maximum Median Minimum Maximum Ilha 9 3,587 1,044 48,518 14,375 4,001 230,443 Conselho 17 3,587 . 1,044 23,097 15,764 4,001 102,503 Freguesi 31 1,630 155 21,655 8,229 615 94,9 18 Source: Authors' calculation basedon'the Census 2000 2. The poverty estimates by strata obtained inthe census-based poverty map are similar to those obtained in the survey. Table 2 presents estimated aggregate poverty measures in the Census and compares them with actual figures from the survey. For each stratum and poverty indicator, the equality o f IDRF-based and Census-based indicators cannot be rejected (at the 95 percent confidence level). Table2: PovertyRatesbasedon IDRF(actual) and Census2003 (predicted), by strata Headcount Index Poverty Gap SquaredPovertyGap IDRF Census IDRF Census IDRF Census (Actual) (Predicted) (Actual) (Predicted) (Actual) (Predicted) Santiago Urban 0.221 0.222 0.065 0.081 0.028 0.042 (0.024) (0.013) (0.008) (0.006) (0.004) (0.004) Santiago Rural 0.522 0.522 0.205 0.207 0.106 0.108 (0.027) (0.024) (0.016) (0.014) (0.01I) (0.010) SV & SL Urban 0.228 0.266 0.069 0.099 0.029 0.05 1 (0.028) (0.012) (0.010) (0.007) (0.005) (0.004) Other Urban 0.346 0.317 0.126 0.118 0.060 0.060 (0.065) (0.033) (0.030) (0.018) (0.016) (0.01I) Other Rural 0.485 0.409 0.189 0.193 0.094 0.101 (0.027) (0.026) (0.014) (0.015) (0.009) (0.009) Sources: Authors' calculation based on IDRF 2000/01 and Census 2002. Robust standard errors are in parentheses. 3. Poverty measures for each o f the 9 Islands, 17 Concelhos and 31 Freguesis have been computed. The estimates and standard errors are available in the Cape Verde poverty assessment. In most cases, standard errors are small so that predicted poverty measures are reliable. The Freguesis results for the poverty headcount are visualized in Figure 1. While the central part o f the Capital (Praia) has the lowest poverty rate, its island (Santiago) has the poorest Freguesis. Sal, Boa Vista and 89 SBo Vicente islands have the least poor Freguesis while the rest of the country has poverty headcounts closer to the national average. Q Sal la,u D Boa Vista Sources: Authors' calculation based on IDRF2000/01 and Census 2000 90 Appendix 7 Consultationson the CountryPartnershipStrategy 1. The Bank carried out two joint preliminary consultation meetings, in February and May of 2008 respectively, with government, development partners, associations and private sector leaders inpreparation o f this joint Country Partnership Strategy. The Bank carried out a special consultation meeting in September, 2008, to obtain preliminary feedback from the stakeholders on the current Strategy. 2. A comprehensive, broad consultation was held in the capital city o f Praia from January 28 to January 30, 2009, inpartnershipand with the full support o f Dr. Manuel Pinheiro, General Planning Director o f the Ministry o f Finance, who made this joint consultation process on the CPS possible and to whom the Bank team i s very grateful. The Bank would also like to express its appreciation to all the participants for their valuable insights and suggestions for the CPS. 3. The January 2009 Consultation was comprised of four meetings with the following groups of stakeholders and partners: public servants, civil society, academia, private sector and members of the international cooperation community, including donors, lenders and representatives from State Embassies. Consultation meetings were attended by around 105 participants and organized into four sessions, distributed as follows: a) January 28, afternoon, public servants and special guests: 53, b) January 29, morning and afternoon, two sessions with civil society, academia and private sector: 28 attendees, and, January 30, one morning session with the internationalcommunity, with 24 attendees includingthe Ambassadorsof China, Franceandthe UnitedStates.Meetingswere heldat the Ministryof Finance(day one), Instituto Nacionalde Economiae Negdcios(day two) andat the UnitedNationsHouse (day three). All meetings were openedby Dr.ManuelPinheiro, followedby a powerpointpresentation by the Bank`s coordinator for the consultations, Ms.Zezk Weiss, contributionsby the participantsand ajoint closingby Dr.PinheiroandMs.Weiss. 4. Overall, all groups welcomed the Consultations initiative, congratulated the Bank and the Government for the effort, and pointedout that this was the first time that a larger group of members of Cape Verde's society were invited to comment on a document such as the CPS, and that this process should be continued. The Consultations confirmedthat the Authorities, the development partnersand the representatives from civil society organizations all agree on the comparative advantage of the Bank's support to the Economic Transformation Agenda, notably by supportingreforms and investmentstowards enhancinginfrastructureservices and fosteringprivatesector developmentinCapeVerde. Inaddition, the Bank is seen as being well positionedto help the country identify new sources and develop the required financial mechanisms to attract private investors and to promote partnership with international cooperation. The consultations also highlighted the importance of ensuring donor complementarity, particularlyto ensure that there is continued support from other partners for the social areas and sectors from whichthe Bank, in agreementwiththe CapeVerdean Government, is withdrawingits direct support. 5. More specifically, the four sessions of the January 2009 Consultation processprovidedthe Bank and Governmentwith the following general contributions.and suggestionsto enhance the quality of the CPS: Environmental Vulnerability: The CPS document barely touches on environmental issues. Given that Bank support is moving towards Energy, State Machine Strengthening and Infrastructure, a deeper insight into the environment could help provide the current line of support with a more 92 sustainable range of programs and actionplans. There were strong suggestions, particularly at the partners' meeting, that the CPS should includethe environment as a transversal point which could be incorporatedthroughoutthe whole document. Infrastructure, Energy and Roads: It was suggested that a new paragraph between actual paragraphs 65 and 66 could be included, and to read as follows: "In spite of the impressive modernization of CapeVerde roadsnetwork, there are still roadsto be rehabilitatedor upgraded, as a response to the two remainingmain problems: a) roads that are important as pre-conditionsfor economic development such as for enhancingtourism opportunities, and, b) rural roadscurrently in badshapeand whichare ofutmost importancefor povertyalleviationandtherefore roadswhich are sociallyjustifiable, since the Government defined these two situations as criteria for prioritizing new roadworks inthe Country. Development and Social Solidarity: Cape Verde's civil society strongly recommends that throughout the CPS all mentions of social solidarity should be complemented by the inclusionof the Developmentword, since boththe CapeVerdean Governmentandthe society that it represents are keento movingbeyondsocial solidarity, which is importantbut needsto be upgradedto a more dynamic approach, which includes social inclusionand social cohesion as undistinguished parts of the social development sought by CapeVerde. Competitiveness:Document needs further work on the business environment. Document needs to bring more clarity in regard to the Bank's support for improving conditions for private sector interventions.Particularly, it needs to more detailed in relationto the specific support that is to be providedto small, medium and large enterprises.Likewise, given the current world economic crisis and its impact on CapeVerde, bothtourism andremittanceprojectionsneedto berevised. Fisheries Sector: Needs a more integrated approach which would include: (a) infrastructure;(b) research; (c) capacity building; (d) repairing of current nets, includingthe establishment of small offices in the islands for repairing small boats, and, (e) investment on development patterns for productquality. Tourism: no attention is given to community alternatives, particularly to job creation in the craftshmallbusinessareas. Housing: a Governmentprioritywhich is barelymentionedby the CPS. Job Creation: CPS needs a more detailed definition of the nature and areas of support that will come from the Bank. Societal Organization: Within the framework of support to State reforms, it is essential that the CPS creates a space for the development of a societal organizationstudy and program, so that the relations betweenthe State Governmentand its municipalities, its civil society, and its partners can be furtherdevelopmentwith clear rules whichwill allow all to minimizepartnershipchallengesand maximize partnershipopportunities. Recommendations: Together with general comments on the CPS document, several specific recommendationswere also providedat the meetings: An urgentstudy needsto bedone on Societal Organization. Minor, rural and sociallyjustifiable roads shouldbe includedinthe roadpackage. Energy support needs to be broadened to include studies and programs on other sources of alternative energy, andto incorporateattentionto environmental issuesin all activities. Document Data and Statistics:Needto be revised, particularly in regardto partners` contributions to the country.TheEmbassy of Spainhas an updatedtable onthe subject, which can berequested. Feedback and Follow-Up on the Consultation: All four groups consulted were interested and requestedthat feedback be providedto their contributions. They emphasizedthe need for further 93 dialogues in order to provide boththe Bank with stronger support through the implementation of the CPS. Finance,throughthis CPS, at least one complete integratedfishingsystem. Monitoring,Evaluation and Dissemination: Mechanisms and strategies shouldbefurther developed and includedas partofthe CPS document. 94 Appendix 8 Millennium DevelopmentGoals Millennium DevelopmentGoals , 1990 11995 I2WJ I 2UU7 I Goal 1: Eradicate extreme aovertv and huneer I Employment to population ratio, 15+, total (%) 55 54 51 49 Employment to population ratio, ages 15-24, total (%) 51 48 42 37 Income share held by lowest 20% .I 4.4 Malnutrition prevalence, weight for age (%o f children under 5) Poverty headcount ratio at national poverty line (YOo f population) 1 Prevalence o f undernourishment (% o f uouulation) I . . I . . I . . I . . I Vulnerable employment, total (YOo ftotal employment) Goal 2: Achieve universal orimarv education Literacy rate, youth female (YOo f females ages 15-24) 86 Literacy rate, youth male ("A o f males ages 15-24) 90 Persistence to last grade o f urimarv. total (% o f cohort) .. 90 89 Primary completion rate, total (%o f relevant age group) 51 I 64 I 102 92 Total enrolled, primary ("A net) .. I 98 91 Proportion o f seats held by women innational parliament (%) 12 1 11 1 11 I 15 Ratio o f female to male enrollments in tertiarv education .. I 100 I 109 Ratio o f female to male primary enrollment 94 1 .. 1 97 I 95 Ratio o f female to male secondarv enrollment .. 1 104 I 115 Ratio o f young literate females to males ("?ages 15-24) 96 Share o f women employed inthe nonagricultural sector (% o f total nonagricultural Employment) .. 38.9 Immunization, measles (YOo f children ages 12-23 months) 79 66 80 65 Mortality rate, infant (per 1,000 live births) 45 37 31 25 Mortality rate, under-5 (per 1,000) 60 50 42 34 I Birthsattendedby skilled health staff (% oftotal) I .. I 54 I 89 I .. I Contraceptive prevalence (%o f women ages 15-49) .. I 53 I Maternal mortalitv ratio (modeled estimate. uer 100.000 live births) .. I 210 Pregnant women receiving prenatal care (%) .. I 99 1 Children with fever receiving antimalarial drugs ("ho f children under age 5 with fever) Condom use, population ages 15-24, female (%o f females ages 15-24) Condom use, population ages 15-24, male (YOo f males ages 15-24) Incidence o f tuberculosis (per 100,000 people) 162 164 166 168 Prevalence o f HIV. female (% ages 15-24) Tuberculosis cases detected under DOTS (YO) .. 1 41 1 33 95 Nationally protectedareas (% of total land area) Goal 8: Develop a global partnership for development Aid per capita (current US$) 1 296 I 289 I 208 I 267 Debt service (PPG and IMF only, %of exports of G&S, excl. workers' remittances) 8.9 10.3 10.5 5.6 Internetusers (per 100people) 0.0 0.2 1.8 7.0 Mobile phone subscribers(per 100people) 0.0 0.0 4.4 27.9 Telephonemainlines (per 100people) 2.3 I 5.4I 12.1 1 13.8 Fertility rate, total (births per woman) 5.4 4.5 3.9 3.4 GNI per capita, Atlas method (currentUS$) 940 1,150 1,280 2,430 GNI, Atlas method (current US$)(billions) 0.3 0.5 0.6 1.3 Gross capital formation (%of GDP) 22.9 42.4 19.7 40.6 Life expectancy at birth, total (years) 65 67 69 71 Literacy rate, adult total (YOof people ages 15 and above) 63 Population, total (millions) 0.4I 0.4I 0.5 I 0.5 96 Cape Verde at a glance 2/24/09 Sub LWW Key Development Indicators Cape Sahalan middle Verde Africa income Aaedistribution. 2007 (2007) Mde Female Populatan, mic!-)ear (millons) 0.47 800 3,437 7 5 7 9 Surfacearea (thousand sq km) 4.0 24,242 35,510 Populatongrowth (Yo) 2.3 2.4 1.o 5 &E4 M a n populatJon(ohoftotal powlaton) 58 36 42 4 5-49 GNI (Atlasmethod US$billions) 1.2 762 6,485 3034 GNI per capita (AMs method, US$) 2,250 952 1,887 1619 GNI per capita (PPP, intetnabonal$) 2,940 1,870 4,544 0 4 GDP growth (%) 6.9 6.2 9.7 20 10 0 10 20 GDP per capita growth (%) 5.O 3.7 8.6 percmt (most recentestimade, 2000-2007) I*% Poverty headcountratioat$l 25 aday(PPP, %) 50 Povertyheadcountratioat$2 00 aday(PPP, %) 72 Under4 mortalityrate(per 1,OW) bfe expectancyat brth (years) 71 50 69 Infant mrtaity (pec 1,OOO Irve births) 25 94. 41 Childmalnutntron(% ofchldren under 5) 180 27 25 150 140 Adult literacy male(% of ages 15 and dder) 88 69 93 120 AdultIi!eracy,femle ("hofages15andolder) 76 50 85 1W Grosspnmaty enrollment,male(% of age group) 108 99 112 so Grosspnmaty enrollment,female (% of agegroup) 60 103 88 109 40 20 Access toan improved water source (% of population) 80 58 88 0 Access toimproved sanitatonfaclities (% of population) 31 54 1990 1995 2wO 2 L E I OCape Verde DSub-Sabmn Afrca Net Aid Flows 1980 1990 2000 2007" (US$ mllions) ~~~~~~ Net O W and official aid 62 105 94 138 Growth of GDP andGDP per capita (%) Top 3donors (in2006): Portugal 16 23 47 Luxemburg 0 8 14 V Netheflands 12 10 6 12 Aid (%of GNI) 41.3 30.9 18.1 12.6 Aid per capta (US$) 214 296 208 267 Long-Term Economic Trends 90 95 W 05 Consumerprices(annual % change) 0.0 4.2 4.4 GDPimplicl deflator (annual %change) 2.3 -1.2 2.8 +GDP - GDPper capih Exchange rate (annual average, localper US$) 40.2 70.0 119.7 80.4 Terms oftradeindex (2000 = 100) 100 98 1980-80 1990-2000 2000-07 (a\Rmge annualgrowth %) Population,mid-year (milions) 0.3 0.4 0.5 0.5 2.1 2.4 2.3 GDP (US$millions) 119 339 531 1,449 6.0 5.4 (% of GDP) Agriculture 8.8 14.4 12.0 8.0 13.7 4.0 0.6 Industry 14.6 21.4 17.9 17.4 13.8 5.1 8.4 Manufaduring 8.2 9.3 7.0 -8.2 3.8 6.5 SeNices 76.6 64.3 47.5 76.0 8.1 6.7 4.0 Househdd final consumption expenditure 84.9 93.4 92.9 99.0 3.6 7.4 5.3 General gov`tfnal consumption expenditure 7.6 14.7 21.3 21.9 1.6 7.2 -2.0 Gross capital formation 53.3 22.9 19.7 47.0 -7.4 0 2 8. 6 Exportsof goods and services 36.1 12.7 27.5 19.0 -0.9 14.6 15.8 Importsof goods and sewices 81.9 43.7 61.4 60.0 -2 2 8.5 IO. 1 Grosssavings 30.6 17.6 9.1 26.1 Note:Figuresin itaks are for )ears other thanthosespecifed. 2007 dataare prelinimry. .. irdicates dataarenot available a. Aiddata arefor2006. Cape Verde Balance of Paymentsand Trade 2000 2007 (US$ milions) Gmemance indcators, 2000 and 2007 Total merchandiseexmlts(fob) 38 78 Total merchandiseinpolts (ci9 230 757 Voiceand acmunbbilty Net tradein goods andservices -184 -414 Poltcalsbbllty Current amunt balance -60 -132 asa%ofGDP -11.4 -8.1 Reguktory quaity Workers' remittan c s and Ruleoflw compensation ofempb)ees(recepts) 07 245 Contol of mrmptlcn Reserves, hclfding @d 20 354 0 25 75 100 CentralGovernment Finance 2007 Corntry's percentilerank(0-100) 02000 t@w vaws hpy betar&p (X of GDP) Currentrevenue (includhggrants) 20.8 30.3 sourn Kaufmam-Krasy-Msstrazl W M Bank Tax revenue 18.5 22.8 Currentevenditure 34.2 18.1 Technology and Infrastructure 2000 2007 Overall sur@usldeficit -25.8 -0.7 Paiedroads (% of total) 69.0 HighestmrgnaltaxIate(%) FKedlineand mbik phOne Individual subscribem @er100people) 17 35 Corpciate Hbhtechnobgyexports (%of manufacturedexports) 0.8 0.0 External Debt and ResourceFlow Environment (US$milions) Total debtoutstanding and disbursed 328 682 Agricultural land(% of landarea) 10 10 Total debt service 16 4 Forestarea (% oflandarea) Debt relief(HIPC, MDFU) - - Nationaitj protected areas (%of land area) Total debt(% of GDP) 59.6 47.2 Freshwaterresourcesper capita (cu. meters) .. 592 Total debtservice(%ofexports) 17.4 4.7 FreshwatervAthdrawai(% of internalresources) 7.3 Foteign directinvestment(net inflows) 44 132 C02 emissions per capita (mt) 0.40 0.55 Poltfolioequity (netinfbws) 0 GDP per unitof energy use (2005PPP$perkgofcilequkaknt) :omposttion oftotal exbmaldebt, 2007 Energy useper capita (kg of oil equivaknt) (US$ mllions) v IBRD Total debtoutstanding anddisbursed 0 0 IMF. 10 Disbursements 0 0 Principalrepayments 0 0 atwrnul8. I6m3 108 Interestpayments 0 0 I S mllons IDA Total debtoutstandinganddisbursed 88 109 Disbursements 10 0 Private Sector Development 2000 2008 Total debtsewice 1 2 Time required tostalt a business (days) 52 IFC (tiscalyeatj Costtostarta busness(%ofGNIpercapita) --- 35.7 Total disbursedandoutstanding pomoio 0 Time required toreaisterDroDertv(davs) 73 of vhich IFCo w account 0 55 Disbursements for IFC OwnaccOunt 0 0 Rankedas amajor constrahtto business 2000 2007 Portfdiosalas, prepapents and (%of managerssurveyedwho agreed) repaymentsfor IFC Maccount 1 1 Electricity 35.7 Access tdcost offnancing .... 16.3 MlGA Gmss exposure 2 0 Stock marketcapitaliation (%of GDP) New guarantee3 0 0 Rankcapital to asset ratio (%) Note:Figuresin itaics are for pars other thanthosespecibd. 2007dataare prelininaiy 2/24/09 .. hdicatesdataarenotavailable. -indicatesobservation is not appicabk. DevelopmentEconomics,Devebpment DataGroup(DECDG). Millennium Development Goals Cape Verde with selected targets to achieve between 1990 and 2015 (estimate c/o.se& to date shown, +I- pars) 2 Goal 1:halvethe raw fw extreme pcwetty and malnutrition 1990 1995 2000 2007 Poverty headcount ratio at $1.25a day (PPP, % of population) Poverty headcount ratio at national povertyline (% of population) Share ofincome or consumptiontothepoorestqunitile(%) 4.4 Prevalence of mahutritkn(%of children under 5) Goal 2: ensurethat children are able to complete primaryschooling Prinary sctwlenrdtnent (net, %) Prmary completion rate (%of relevant age group) 51 s4' 102 92 Secondary school enrollment(gross,%) 21 63 80 Youth literacy rate(% of people ages 15-24) Goal 3: eliminate gender dsparity in education and empowrwomen Ratioof girts to boy in pimary and secondary education (%) Womenempbyedinthe nonagriculturalsector (% of magriwltural employment) Proportionofseats held bywornen h nationalparliament(%) Goal 4: reduceunder4 mortality bytwo-thirds Under4 rnortalityiate(per 1,000) 60 50 42 34 Infantmortalityrate(per 1,OW live births) 45 37 31 25 Measles immunization (proportion of oneyear dds inmunized, %) Goal 5: reducematernal mortality bythreeSourths Maternal mortaiitv ratio (modeled estimate. oer 100.000live biths) Births attendedb;skill& health staff ("IO of total) Contraceptive prevalence (YOof wmen ages 1549) Goal 6: haltand begin to reverse thespread of HVlAlDS and dher majordiseases Prevalenceof HIV WOof DoDulationaQes 15-49) Incidenceof tuberc*llosis'@er lOO,W6 people) Tuberculosis cases detected under DOTS(%) Goal 7: halvethe proportion d peoplewlthorrtsustrinableaccess to basic needs Access to an mprovedwater soum (% of population) 79 80 80 Access to improvedsanitationfacilties (% ofpoyxllation) Forest area (YOoftotal land area) Nationaly protected areas (% of total landarea) C02 emissions (metric tons percapita) 0.2 0.3 0.4 0.6 GDP perunitofenergyuse(constant2005 PPP $per kgofoil equivalent) Goal 8: develop a global partnership fordevelopment Telephone mahlhes(per 100people) 2.3 5.4 12.1 13.8 Mobie phone subscrbers@er100 people) 0.0 0.0 4.4 27.9 Internetusers (per 100people) 0.0 0.2 1.8 7.0 Personal computers (per 100 people) 0.4 5.5 13.0 I Education indcatws (%) Measles immtnbation ?YO of I-year olds) ICT indicators (per IW people) 5 1 la1 la, I n 0 1 2wo 2CCQ 2034 2036 1990 1885 2m 2005 2030 2m 2034 2M)5 -0-Piimty net emolmnt ratio (..) +Ratioof gilsto boysin Firnay& OFixed + rmble subsabers semnjarveducatim (..) OCap V a d (..) OSubSaharanAfrica lnternetusas Note: Figuresinitaicsareforparsother thanthosespecikd. .. indkatesdataare notavailable. 2/24/09 Development Economics, Devebpment EataGroup (DECDG). CPS Annex B2 CapeVerde - Selected Indicators*of BankPortfolioPerformanceandManagement As ofQ3IQ9l2QQ9 Indicator 2006 2007 2008 2009 Portfolio Assessment NumberofProjectsUnderImplementation 5 6 4 3 Average ImplementationPeriod(years) 4.6 5.0 7.9 5.5 PercentofProblemProjectsbyNumbera, 20.0 0.0 0.0 0.0 Percent ofProblemProjectsby Amount 32.8 0.0 8.8 0.0 Percent ofProjectsat Riskby Number 20.0 0.0 0.0 0.0 Percent ofProjectsat Riskby Amount 32.8 0.0 8.8 0.0 DisbursementRatio(%) e 30.0 57.0 55.6 52.8 Portfolio Management CPPR duringthe year (yes/no) No No No No SupervisionResources(total US$) 364 330 377 168 Average Supervision (US$/project) 73 55 94 42 Last Five Memorandum Item Since FY 80 FYs Proj Evalby OEDbyNumber 18 5 Proj Evalby OEDby Amt (US$ millions) 192.9 64.3 % of OEDProjectsRatedUor HUbyNumber 5.6 20.0 %of OEDProjectsRatedUor HUby Amt 4.7 14.0 a. As shown inthe Annual ReportonPortfolioPerformance(except for current FY). b. Average age ofprojects inthe Bank's countryportfolio. d. As definedunderthe PortfolioImprovementProgram. e. Ratioof disbursements duringthe year to the undisbursedbalance ofthe Bank's portfolioat the beginningofthe year: Investmentprojectsonly. * All indicatorsare for projectsactive inthe Portfolio, withthe exceptiono fDisbursementRatio, which includesall activeprojectsas well as projectswhich exitedduringthe fiscal year. 100 Cape Verde CPS Annex B3: IBRD/IDA ProgramSummary (As of 03/09/2009) Proposed IBRDADA Base-Case LendingProgram Fiscal Strategic Rewards Implementation year Project ID U ~ w V (H/WL) * Risks (H/WL) * 2009 PRSC4 (IDA) 10.0 H L Sub-total 10.0 2010 PRSC 5 (IDA) 10.0 M Transport Sector SIL (IDA) 5.0 M GrowthTA and SME Support (IDA) 3.5 H West Afiica RegionalFisheriesProject (IDA)** 1.5 M Energy Sector (IBRD) 41.8 H Guarantee - RenewableEnergy (IBRD) 11.0 M Sub-total 72.8 2011 PRSC 6 (IDA) 10.0 H M Sub-total 10.0 2012 PRSC 7 (IDA) 10.0 H M InvestmentProjectto be identified(IDA) 1.5 H M Sub-total 11.5 TOTAL 104.3 *H=High;A4 =Medium ;L =Low 101 CPS Annex B3 for CapeVerde CapeVerde- IFC InvestmentOperationsProgram,FY05-09 (As of 03/09/2009) 2005 2006 2007 2008 2009* CommitmentsCUS%m) Gross 0 0 0 5.89 0 Net** Net Commitments bv Sector WO) Finance 0 0 0 0 0 Telecommunications 0 0 0 100 0 Net Commitments bv InvestmentInstrument Loan 0 0 0 67.5 0 Quasi loan 0 0 0 32.5 0 Total 0 0 0 100 0 **IFC's Own Account only 102 CapeVerde CPS Annex B4: Summaryof Non-lendingServices (As of 03/09/2009) Product Completion FY Cost Audience Objective FY (us%ooo) Recentcompletions PRSP ProgressReportand 2008 65 Bank,Government,Donors, Knowledge generation,problem GeneralEconomic Work* Public dissemination solving PERUpdate 2008 203 Bank, Government,Donors, Knowledgegeneration, public Public dissemination debate, problemsolving Underway CountryPartnershipStrategy 2009 90 Bank, Government,Donors, Knowledgegeneration, public Public dissemination debate, problemsolving FullGPRSPandGeneral 2009 00 Bank, Government,Donors, Knowledgegeneration,public EconomicWork* Public dissemination debate, problemsolving PovertyAssessment Update 2009 00 Bank, Government,Donors, Knowledgegeneration,public Public dissemination debate, problemsolving FinancialSector Assessment 2009 Bank, Government Knowledgegeneration, problem Program solving Initial Assessment ofLabor 2010 78 Bank, Government,Donors, Knowledge generation,public Markets(formerly Skills Public dissemination debate, problemsolving DevelopmentStudy) Planned GPRSPProgressReportand yearly 65 per Bank, Government,Donors, Knowledgegeneration,problem GeneralEconomic Work* Year Public dissemination solving Other Sector Work (to be 2010-12 100per Bank,Government,Donors, Knowledgegeneration,public identified) Year Public dissemination debate, problemsolving PER 2011 100 Bank,Government,Donors, Knowledgegeneration,public Public dissemination debate, problemsolving **Note, while GPRSP work isfor public dissemination,portions ofgeneral economic work arefor the Bank. 103 Cape Verde CPS Annex B5: Social Indicators - Latest sing le year Same regionlincome group Sub Lower- Saharan mlddle- 1980-85 1990-95 2001-07 Africa Income POPULATION Total population,mid-year (millions) 0.3 0.4 0.5 799.8 3,437.1 Growthrate(% annualaerage for period) 2.0 2.4 2.3 2.5 1.1 Urban population (%of population) 31.5 48.8 58.0 35.9 41.7 Total fertility rate (birthsperwoman) 5.2 2.3 POVERTY (% ofpopulation) Nationalheadcount index Urban headcount index Rural headcount index INCOME GNI per capita (US$) 1,170 2,250 952 1,887 Consumer price index (2000=100) 87 . 108 111 137 144 Food price index (2000=100) INCOME/CONSUMPTIONDISTRIBUTION Gini index Lowest quintile (% of incomeor consumption) 4.4 Highestquintile (% ofincomeor consumption) 55.6 SOCIAL INDICATORS Publicexpendlture Health(% of GDP) 2.6 2.0 Education (%of GNl) 4.2 4.7 Net primaryschool enrollment rate (% of age group) Total 70 90 Male 72 91 Female 67 90 Access to an improvedwater source (% ofpopulation) Total 79 80 58 88 Uban 86 86 81 96 Rural 73 73 46 83 Immunization rate (% of childrenages 12-23monBs) Measles 72 77 DPT 73 75 Child malnutrition(% under5years) 27 25 Lifeexpectancy at birth (years) Total 63 67 71 51 69 Male 50 67 Female 52 71 Mortality Infant (per 1,000live births) 53 37 25 94 41 Under 5 (per 1,000) 70 50 34 157 54 Adult (15-59) Male (per 1,000population) 421 202 Female (per 1,000 population) 391 128 Maternal(per 100,000 livebirths) 900 300 Births attended by sldlled healthstaff (%) 45 69 CAS Annex 85. This table was producedfrom the CMU LDB system. 02/26/09 Note: 0or 0.0 means zero or less than half the unit shorn. Net enrollment rate: break inseries betwaen 1997and 1998due to change tom ISCED76 to ISCED97. Immunization:refers to childrenages 12-23 monthswho receivedvaccinations before one year of ageor at any time before the survey. 104 CapeVerde CPSAnnex B6: Key EconomicIndicators - ~~ ~~ ~~~~ ~~~~ Actual Estimate Projected Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 National accounts (as YOof GDP) Gross domestic product' 100 100 100 100 100 100 100 100 100 Agriculture 10 9 8 8 8 I I 7 7 Industry 15 16 16 17 17 17 18 18 19 Services 15 75 16 16 76 76 15 15 15 Total Consumption 105 91 85 99 95 95 92 91 91 Gross domestic fixed investment 39 41 43 41 44 42 41 41 40 Government investment 4 6 6 5 7 8 8 9 9 Private investment 35 35 38 34 32 32 32 32 32 EXPOITS (GNFS)~ 14 16 18 19 19 20 20 21 21 Imports (GNFS) 59 54 56 60 58 60 59 60 61 Gross domestic savings -5 3 5 1 5 5 8 9 9 Gross national savings' 22 29 38 38 31 21 27 28 28 Memorandum items Gross domestic product 918 1006 1203 1449 1509 1511 1686 .., ... (US$millionat current prices) GNIper capita (US$,Atlas method) 1630 1980 2130 2250 2380 2530 Real annual growth rates (%, calculated from 80 prices) Gross domestic product at market prices 4.3 6.5 10.8 6.9 6.0 3.5 5.0 6.6 6.3 Gross Domestic Income -15.6 9.1 0.8 3.7 -0.1 0.9 Real annual per capita growthrates (%, calculated from 80 prices) Gross domestic product at market prices -3.0 9.3 8.8 5.0 4.0 1.6 3.0 4.5 4.3 Total consumption -1.9 -2.1 3.1 4.4 2.6 3.3 3.5 Private consumption -2.2 -2.4 3.1 4.2 3.4 3.5 3.2 Balance of Payments(US$millions) ~xp01-t~(GNFS)~ 295 361 500 623 698.6 635.8 737.9 860.1 992.8 Merchandise FOB 57 89 99 18 92.7 74.0 84.1 91.6 97.6 Imports (GNFS)~ 643 641 806 1038 1170.6 1179.8 1248.2 1381.8 1560.3 Merchandise FOB 436 438 518 151 835.3 838.6 882.7 982.2 1112.7 Resource balance -348 -280 -306 -415 -472.1 -544.0 -510.3 -521.6 -567.5 Net current transfers 233 219 291 309 279.4 309.7 282.7 310.8 350.0 Current account balance -133 -34 -60 -132 -192.7 -234.3 -227.6 -210.9 -217.5 Net private foreign direct investment 20 15 114 132 150.0 135.7 147.6 170.6 189.4 Long-term loans (net) Official 16 24 51 I O 47.1 86.3 69.0 83.2 89.2 Private Other capital (net, incl. enors & ornrnissions) Change inreservesd -30 -33 -60 -91 27.9 -1.0 25.2 63.7 74.6 Memorandum items Resource balance ("?o f GDP) -31.9 -21.8 -25.4 -28.6 -25.0 -21.2 -24.4 -24.6 -24.5 Real annual growth rates ( YR80 prices) Merchandise exports (FOB) Primary Manufactures Merchandise imports (CIF) 105 CapeVerde CPS Annex B6: Key EconomicIndicators(continued) - Actual Estimate Projected Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 Public finance(as YOofGDP at marketprices)e Current revenues 32.3 30.0 29.4 30.1 30.3 30.9 30.0 28.8 28.5 Current expenditures 22.1 21.2 17.9 19.1 17.7 19.8 20.4 19.0 20.4 Current accountsurplus (f) or deficit (-) 10.2 8.8 11.5 11.0 12.6 11.1 9.6 9.8 8.1 Capital expenditure 10.9 12.4 11.8 10.5 12.6 15.1 14.7 14.4 14.3 Foreign financing 10.3 10.3 10.6 8.2 9.0 10.1 8.9 7.7 7.9 Monetary indicators M2/GDP 73.8 77.6 77.0 76.4 79.1 78.8 79.2 79.4 79.6 Growth of M2(%) 10.5 15.5 18.0 10.8 7.9 9.2 7.8 8.4 11.3 Private sector credit growth/ total credit growth (YO) 4.2 -4.5 44.6 87.1 66.7 94.2 84.6 Price indices(YR96 = 100) Merchandiseexport price index 108.2 141.9 141.3 106.3 106.5 108.1 110.5 110.0 120.0 Merchandise import price index 180.0 180.0 220.0 270.0 260.0 290.0 320.0 360.0 400.0 Merchandiseterms oftrade index 60.1 78.8 64.2 39.4 41.0 37.3 34.5 30.6 30.0 Real exchangerate (US$/LCU)' 105.4 108.2 111.1 114.1 Real interest rates Consumer price index (%change) -1.9 0.4 4.8 4.4 6.8 3.6 2.7 2.0 2.0 GDP deflator (%change) -1.1 2.8 6.8 2.8 7.4 a. GDP at marketprices b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excludingofficial capital grants. d. Includes use of IMFresources. e. Consolidated central government. f. "LCU" denotes"local currencyunits." An increaseinUS$/LCU denotesappreciation. 106 Cape Verde CPS Annex B7:KeyExposureIndicators - Actual Estimated Projected Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total debt outstanding and 504 541 568 617 681 789 867 960 1061 disbursed (TDO) (US$m)" Net disbursements (US$m)a 16 7 Total debt service (TDS) 6 6 8 11 16 20 24 (US Debt anddebt service indicators (%) TDO/XGS~ 121.6 104.4 87.6 83.6 82.3 119.5 130.7 TDO/GDP 54.5 54.2 72.6 62.8 52.5 51.5 51.3 51.5 50.7 TDS/XGS 3.8 5.6 5.7 4.7 5.1 6.1 5.5 5.0 5.3 ConcessionaYTDO IBRDexposure indicators(%) IBRD DS/public DS 0.0 0.0 0.o 0.0 Preferredcreditor DS/public 81.5 70.4 91.5 92.2 DS (%))" IBRD DSlXGS 0.0 0.0 0.o 0.0 IBRD TDO (US$m)d 0 0 0 0 Ofwhich presentvalue of guarantees (US$m) Share of IBRDportfolio (%) 0 0 0 0 IDA TDO (US$mld 196 214 106 109 IFC (USSm) Loans Equity and quasi-equity /c MIGA MIGA guarantees (US$m) a. Includespublic andpublicly guaranteed debt, private nonguaranteed, useof IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers'remittances. c. Preferredcreditors are defined as IBRD, IDA, the regionalmultilateral development banks, the IMF, and the Bank for International Settlements. d. Includespresent value ofguarantees. e. Includesequity and quasi-equity types ofboth loanand equity instruments. 107 3 0 N zi% 2 rd E a E e c 8 8 P P E2 c 2 ez5 8 3 5 ru ru 0 0 25°W 24°W 23°W This map was produced by the Map Design Unit of The World Bank. RIBEIRA The boundaries, colors, denominations and any other information GRANDE shown on this map do not imply, on the part of The World Bank Ribeira Grande Group, any judgment on the legal status of any territory, or any Vila das Pombas endorsement or acceptance of such boundaries. Ribeira da Cruz PAÚL Lajes Santo Antão 17°N PORTO (1803 m) Porto Novo 17°N NOVO Mindelo SÃO VINCENTE W I N D W A R D Calhau São Pedro Madeiral São Vicente Santa Luzia Sal Espargos SÃO NICOLAU Ilhéu Branco SAL Ilhéu Raso Riberia Brava Santa Maria Tarrafal Preguica I S L A N D S São Nicolau AT L A N T I C O C E A N Sal-Rei BOA VISTA Norte Boa Vista Povocão Velha Povocão 16°N 16°N CAPE VERDE DS CAPE VERDE LEEWARD ISLANSão Tiago TARRAFAL SANTA Maio Tarrafal CRUZ MAIO SANTA Santa Cruz SELECTED CITIES AND TOWNS CATARINA Vila do Maio Santa Catarina NATIONAL CAPITAL Mosteiros Ilhéus Do Igreja MOSTEIROS São Domingo São RIVERS Rombo 15°N Mt. Fogo DECEMBER SÃO MAIN ROADS (2,829 m) 0 10 20 30 Kilometers Brava Furna PRAIA DOMINGOS IBRD São PRAIA COUNTY (CONCELHO) BOUNDARIES BRAVA Filipe SÃO FILIPE 0 10 20 30 Miles 33383 2004 INTERNATIONAL BOUNDARIES Fogo 25°W 24°W 23°W