Author (s): African Development Bank Group (AfDB)
The African Development Bank Group is a development and finance institution which focuses on sustainable economic development, social progress, and poverty reduction.
Economic Performance and Outlook
Following weak GDP growth averaging 1.8% between 2010 and 2015, the economy picked up in 2016, registering 3.8% growth, driven by agriculture and services (primarily tourism). Domestic demand showed signs of recovery following an increase in government spending and private-sector credit. The trend continues, with GDP growth estimated at 4% in 2017 and projected at 4.1% in 2018, boosted by the recovering tourism sector. Diversifying the economy remains a priority for long-term sustainable growth. Services account for approximately 70% of GDP, of which tourism accounts for 20%.
Since 2015, the government has engaged in fiscal consolidation by increasing pressure on the Public Investment Program and by expanding the tax base. The budget deficit fell from 4.1% of GDP in 2015 to 3.3% in 2016. However, public debt increased from 71.9% of GDP in 2010 to 130% in 2016. To alter course, the government intends to mobilize domestic resources, increase public expenditure efficiency, and reduce debt related to public enterprises.
The budget deficit reached an estimated 4.1% in 2017 and is projected at 4.4% in 2018. In 2016, inflation was –1.4%, due mainly to low energy and food prices. Inflation was estimated at 1.1% in 2017 and is projected to rise to 2% in 2019. The current account deficit shrank to 5.4% of GDP in 2016 due to increased tourism, weak oil prices, and higher remittances from overseas nationals. It is expected to climb to 7.2% in 2017, tracking rising oil prices. Total reserves grew from 4.5 months of imports in 2013 to 6.5 months in 2016, mostly through lower imports and reduced public investment spending.
Cabo Verde’s economy depends heavily on tourism, which accounts for 47% of exported goods and services. In 2018, foreign direct investment is projected to rise considerably. Manufacturing and catering are likely to expand over the next three years. Despite weak growth in Europe, remittances (which accounted for 11% of GDP in 2016) are expected to continue to increase, helping economic growth. In 2017, Cabo Verde drafted a new Sustainable Economic Development Plan that focuses on promoting the private sector, stimulating economic transformation and diversification to improve resilience to climate change, and strengthening regional integration within the Economic Community of West African States.
The economic outlook depends on overcoming several challenges that affect long-term growth and development, including improving productivity factors, which are currently in decline; diversifying the economy; strengthening resilience to external shocks, notably those related to climate or trade dependence on Europe; and restructuring public enterprises, such as Cabo Verde Airlines and IFH (social housing), whose debts are close to 20% of GDP. Other recent external factors, such as rising borrowing costs resulting from an appreciating U.S. dollar, have exacerbated the country’s macroeconomic situation. Unemployment among young people, who account for half of the working-age population, is problematic. In 2016, the unemployment rate was 28.6% among those ages 15–24, compared with 15% among the total population. Moreover, competitiveness is restrained by a mismatch between the skills of the domestic labor force and business needs.
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