February 2009 prem 4 Africa Region

Source: Central Bank of Cape Verde. Fiscal Consolidation

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Source: Central Bank of Cape Verde.

Fiscal policy is consistent with macroeconomic stability and debt sustainability. Over the past few years, Cape Verde has demonstrated prudent fiscal policy. As a result of improved tax collection and expenditure control, the fiscal deficit, including grants, averaged 3.8 percent of GDP during 2002–06 (4.4 excluding 2004),^⁴ In 2007 the deficit was expected to stand at 4.6 percent of GDP, reflecting a continuing strong revenue performance due to economic growth, improvements in tax administration, and restraint on expenditures. These factors have reduced the government’s resorting to domestic credit.
The 2008 Budget law suggests that the fiscal policy stance will be firm. Recurrent spending will decline as a share of GDP due to a reduction (as a share of GDP) of wages and salaries, goods and services, and subsidies, thus freeing resources for capital expenditures. Following the elimination of petroleum product and utility tariff subsidies, the budget does not, in principle, allow for oil-related subsidies. Furthermore, hiring and promotions have been frozen until the revision of the Career and Salary System Plan, expected in 2008.

Table 1.4: Central Government Fiscal Operations, 2000–06
(CVE million)

	2002	2003	2004	2005	2006¹	2007²
Total revenues (CVE million)	23,491	22,445	26,334	28,178	30,826	35,301
Total expenditure (CVE million)	27,019	25,641	26,853	31,911	35,400	40,154
Interest rate payments	2,162	1,994	2,056	1,927	1,920	1,883
GDP at current prices (CVE million)	72,758	79,527	82,116	88,733	101,551	105,178
Overall balance, incl. grants (CVE million)	-3,528	-3,196	-519	-3,733	-4,574	-4,853
Overall primary balance, incl. grants (CVE million)	-1,366	-1,202	1,537	-1,806	-2,654	-2,970
	-1,366	-1,202	1,537	-1,806	-2,654	-2,970
Overall primary balance, incl. grants (% GDP)	-1.88	-1.51	1.87	-2.04	-2.61	-2.82
Overall balance, incl. grants (%GDP)	-4.85	-4.02	-0.63	-4.21	-4.50	-4.61

Source: Ministry of Finance and Public Administration, IMF, and staff estimates.

Notes:

1 Preliminary accounts.

2 Approved budget.

Significant progress has been achieved with debt management. The total central government net debt and guarantees began a declining trend in 2005 and have been declining sharply since then. They fell from 87 percent in 2005 to 77 percent of GDP in 2006 owing to the rapid GDP growth and prudent fiscal stance. The domestic debt-to-GDP ratio was reduced from 33 percent in 2005 to 29 percent in 2006, and was expected to reach 23 percent by the end of 2007. The Policy-Support Instrument (PSI) program aimed to lower the domestic debt to close to 20 percent of GDP by 2009. However, net domestic debt is now projected to decline to below 20 percent by the end of 2008, one year ahead of the IMF program-Policy Support Instrument (PSI) schedule. An analysis of the sustainability of Cape Verde’s public debt carried out in December 2007 concluded that, in spite of the likely gradual reduction in access to concessional loans, Cape Verde’s debt stock and flow indicators will remain below their policy-dependent thresholds throughout the projection period (annex 1).

Table 1.5: Key Debt Policy Indicators
(% of GDP)

Notes: 1 Projections.

Source: Ministry of Finance and Public Administration, IMF, and staff estimates

In July 2006, the IMF approved the request by the government for a three-year Policy Support Instrument. The PSI is designed to support the government’s economic objectives and policy framework for 2006–09. This program focuses on measures to reduce macroeconomic risks, provide a margin of safety against exogenous shocks, and address the prospects of a longer-term decline in highly concessional external support. The third review was completed in December 2007.

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