Auteur : Banque mondiale (World Bank)

Site de publication : worldbank.org

Type de publication : Rapport

Date de publication : Mai 2023

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The State of the Economy

Recent Developments

Real Sector

Growth rebounded strongly in 2022, despite global economic headwinds. Good performance by the tourism sector, combined with higher private consumption, supported growth. However, elevated global fuel and food prices have exacerbated inflationary pressures.

The shock resulting from COVID-19 produced the largest contraction on record (19.3 percent) in 2020 and exposed the country’s economic vulnerabilities. Prior to the crisis, Cabo Verde experienced robust economic growth driven by a thriving tourism sector and strong structural reforms, mainly around the SOE sector. Between 2016 and 2019, growth averaged 5 percent (3.2 percent in per capita terms). The COVID-19 shock negatively impacted the country through the tourism sector, which represents 25 percent of GDP and drives around 40 percent of overall economic activity, and through the reduction of Foreign Direct Investment (FDI), a critical source of external finances and a key driver of growth. The crisis was driven by the nine-month shutdown of the tourism sector and their associated negative spillovers in upstream sectors. Net exports were a drag on growth, with a reduction of exports of goods and services of 58.9 percent. Reversing the progress made since 2015, the national poverty rate (using the $3.65 per-day-2017 Purchasing Power Parity) increased from 16.1 percent in 2019 to 21.5 percent in 2020.

After having grown by 7 percent in 2021, Cabo Verde’s economic recovery from the COVID-19 pandemic has strengthened in 2022, with growth reaching 17.7 percent. On the supply side, growth was underpinned by the value added of accommodation, commerce, and transport sectors, which accounted for 67 percent of GDP growth, as well as by taxes net of subsidies, which accounted for 23 percent of GDP growth. The strong recovery of the tourism sector, with tourist arrivals surpassing 2019 levels, is driving economic activity in the country. The construction sector underperformed in 2022, resenting the high levels of inflation that created uncertainty and led to the postponement of domestic investments. Overall, the services sector contributed 17 p.p. to GDP growth, while manufacturing, driven by fish processing industries, contributed 1.3 p.p. The agriculture and fishing sector negatively contributed 0.7 p.p. to growth, reflecting mainly the 5-year long drought that continues to strike the country.

Exports and private consumption led economic growth on the demand side. Exports, mainly tourism, and private consumption accounted for the economic growth, reflecting higher external demand and complete resumption of mobility. Total investment decreased in 2022, by 31.8 percent, with high uncertainty and prices affecting domestic investment decisions. However, FDI performed well in 2022, accounting for 4.9 percent of GDP, up 0.5 percentage points compared to 2021. With the boost in economic activity, imports also increased, particularly consumer goods and fuel, contributing negatively with 8.6 p.p. to GDP growth. Government consumption also contributed negatively to growth, by 1.6 p.p., reflecting efforts to refrain from unnecessary spending.

Outlook and Risks

Real GDP growth is projected to reach 4.4 percent in 2023 and remain close to potential over the medium term. Growth will be supported by private consumption, investment in tourism and the blue economy, and is expected to average 4.5 percent between 2023 and 2025.

As the Government restructures the operation of several important SOEs through public-private partnerships (PPPs), direct sale and concession arrangements, and implements structural reforms under the strategic plan for sustainable development (PEDS 22-26), further private investment will be mobilized to support growth. The Strategy aims to achieve greater and more sustained growth through increasing economic resilience, boosting productivity, and reducing market fragmentation. The successful implementation of the Strategy will enable local entrepreneurs to benefit from positive spillovers from the thriving tourism sector, thereby creating a more diversified and sustainable economy.

Inflation is expected to moderate in 2023, as global growth moderates, commodity prices stabilize, and supply bottlenecks ease. Headline inflation is projected at 5.2 percent. The increase in the central bank’s reference interest rates planned for 2023, to reduce the interest rate differential with the Eurozone and protect the peg, will help to control inflation. Over the medium-term, the strong nominal anchor provided by the peg with the Euro and the return to fiscal consolidation will keep inflation contained, converging to 2 percent by end-2024.

The Government aims at maintaining the strong level of total revenue over the medium term, with a progressive increase in tax revenue in lieu of grants. Fiscal revenue is expected to increase about 20 percent relative to 2022, representing 24.4 percent of GDP. This projection stems from the increase in tax collection, resulting from (i) economic dynamism (GDP growth of 4.4 percent); (ii) improving the efficiency of tax administration to combat fraud and tax evasion; (iii) rationalization of tax incentives, with emphasis on the phasing out of the total import duty exemption; (iv) strengthening of tobacco and alcohol taxation, (v) increasing the tourism tax on daily stay at hotel to CVE 276 CVE (+ CVE 56) (vi) broadening of the tax base, namely in e-commerce; and (vii) provision for the meeting of accounts in the scope of tax debts. An increase in the collection of revenue from autonomous institutes, funds and services is also foreseen, as well as property revenue arising from the completion of concessions and privatization processes. The adoption of the ECOWAS Common External Tariff, which was postponed to 2023 due to the lingering impact of COVID-19 crisis, is also projected to increase trade tax revenue over the medium term. These measures will lead to an increase in tax revenue from 18.1 percent of GDP in 2022 to 19.4 percent by 2025.

Total expenditure will remain high in 2023, at 29 percent of GDP, and gradually decline with the phase out of the exceptional measures to contain the impact of the war in Ukraine and improved expenditure efficiency. Current expenditure is expected to increase from 23.8 percent of GDP in 2022 to 24.8 percent in 2023. This growth results from (i) updating the social pension and raising the minimum wage to CVE 14,000, with an expected impact of 0.06 percent of GDP (ii) the disbursement of loans for project financing, rescheduled for 2023; (iii) the increase in external grants and (iv) the increase in some mandatory expenditure arising mainly from: (a) expenditure on debt charges; (b) the remaining three months of the mitigation measures adopted in 2022, in response to price increases in food and electricity; (c) the expansion of the number of beneficiaries of non-contributory pensions and wage updates for civil servants and pensioners. Over the medium term, lower spending on goods and services will gradually reduce current expenditures. Capital expenditure is projected at 4.2 percent of GDP in 2023 and to approach 3.8 percent by 2025. Total expenditures will account for approximately 27.4 percent of GDP in 2025.

The overall fiscal deficit will remain relatively stable in 2023 at 4.6 percent of GDP, declining to 2.2 percent of GDP in 2025 due to increased fiscal revenues. The government plans to contract CVE 11 billion to cover the budget’s financing needs (fiscal deficit and debt amortization). Of this amount, around 40 percent is projected to be financed with external debt and 60 percent with treasury bonds issued in the domestic market. External financing will come from multilateral and bilateral creditors on concessional terms. Domestic borrowing will be through the issuance of short, medium, and long-term treasury bonds. A reduction in the debt-to-GDP ratio to 110.7 percent is expected for 2023, with the start of a revenue driven fiscal consolidation that will lower the fiscal deficit and continued increase in GDP. Fiscal risks will remain high as the fiscal deficit is exposed to contingent liabilities in sectors particularly vulnerable to external shocks.