Macroeconomic Developments Robust Growth and Low Inflation

Macroeconomic Developments

Robust Growth and Low Inflation

1. 
   The Government’s development strategy for 2004–07 was set out in the Growth and Poverty Reduction Strategy Paper (GPRSP-1). The GPRSP-1 was built on the Interim Poverty Reduction Strategy Paper, which in turn was underpinned by the National Development Plan. GPRSP-1 was part of a broad strategy underway in Cape Verde since the beginning of the decade to promote growth and reduce poverty. The GPRSP-1 focused on five key pillars: (i) promoting good governance; (ii) improving competitiveness and private-sector-led growth, (iii) fostering human and capital development; (iv) strengthening social security and solidarity; and (v) improving infrastructure and land-use management. The authorities concluded in May 2008 the second Growth and Poverty Reduction Strategy Paper (GPRSP-2), which covers the period 2008-11 and maintains the thrust of the GPRSP-1, being broadly based on the same five pillars.
   
2. 
   Cape Verde has continued to experience robust growth over the last years. GDP growth averaged 6.3 percent over 2002–06, with real GDP growth in 2006 reaching 10.8 percent. Estimates for 2007 indicated that GDP growth rate was likely to be approximately 7 percent. With the exception of 2004, real GDP growth exceeded GPRSP-1 estimations.¹ Reflecting this solid performance, Cape Verde graduated to middle income status on January 1, 2008. Prospects for the medium term also are optimistic. According to the most recent projections, GDP growth is expected to stand at 7.5 percent on average over 2008–10. Even though it is still high, unemployment fell to 18.6 percent in 2006, down 6.1 percentage points from 2005.
   

1 Preliminary estimates.

2 Projections.

3. 
   The strong economic growth is driven largely by tourism-related activities. The fast economic growth in Cape Verde is mostly explained by public and private investment directed principally toward infrastructure development and tourism. In 2006 tourism receipts amounted to approximately 19 percent of GDP, whereas in 2002 they reached only 10 percent. Tourism also is driving growth in other industries, most notably construction, transportation, telecommunications, and financial services. Tourism-related investments are expected to continue to evolve positively, with approximately US$1 billion worth of FDI in tourism in the pipeline. On the other hand, agriculture, fisheries, and the manufacturing industry capture only a small share of the economy (Cape Verde does not have natural resources and labor; electricity and water costs are high).
   

1 Preliminary estimates.

4. 
   Inflationary pressures are moderate and supply driven. Bolstered by a firm monetary policy and an exchange rate pegged to the Euro, consumer inflation has been subdued in the past few years (-1.9 and 0.4 percent respectively in 2004 and 2005). However, in 2006 inflation reached approximately 5.4 percent, largely reflecting supply shocks (poor rainfall temporarily drove up domestically produced food prices). In 2007, inflation stood at around 4.4 percent, once again driven by food prices (domestically produced). The recent increase in international food prices has not yet had an impact on domestic prices (GPRSP-2), owing to the large stocks of cereals. As these stocks are reduced, prices may increase, but this is not likely to threaten fiscal or external stability in the short term given the fiscal space and comfortable level of international reserves. Inflation over the medium term is expected to stabilize at around 2 percent consistent with the currency peg.
   

Source: National Institute of Statistics, IMF, and staff estimates.